The ICE Dec contract finished the week little changed – off 21 points at 71.04. Still, the front month continued to challenge established resistance near 72.00 – 72.50 each day this week.
Demand for US cotton for export remained strong for the week ending Nov 24, with the US now 62% committed Vs the USDA’s 12M bale export target. Total net sales were much higher than our expectations and cancellations were nearly non-existent. However, the pace of shipments remains well below the seasonal cumulative average level. The most recently reported sales were accomplished at a volume weighted average price just north of 72.00, basis Mar, and this level continues to exhibit considerable market resistance.
Further out, demand looks promising with on-call sales for the week ending Nov 25 continuing to move higher week-on-week. However, although mill commitments of approximately 7.75M bales against the current marketing year outnumber producer commitments by a ratio of greater than 10:1, when one takes into account the level of cotton currently held in the CCC loan that was not committed on-call, the ratio is less than 1:1. This is supportive, but not nearly so much as the 10:1 ratio implies.
Over the near-term, the heavy futures positions held by both the trade and the specs will likely continue to contribute to range-bound trading action. And, it could cause volatility to increase, especially as the Mar contract matures.
Internationally, cotton arrivals are beginning to accelerate in India, as are shipments of new crop cotton out of Xinjiang, China. Indian cotton arrivals will likely apply pressure to the ICE contracts, although the unofficial ban on Indian imports by Pakistan should be considered a mitigating factor. Current spot prices for Xinjiang new crop stocks in China also should be supportive of our market.
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The USDA will release its Dec WASDE report on Friday, Dec 9. Although I have not gone through all of the analytical paces just yet, I do not foresee large changes being made to the balance sheets Vs those put forth in Nov. I had expected the last two export reports to be lackluster, but they were anything but. Without something drastically changing with respect to the data for the sales period ending Dec 1, I would expect the USDA to hold its 12M bale export projection in place. After all, US shipments do tend to accelerate noticeably after Jan 1.
Producers outside Texas have seen both interest and the spot basis slip somewhat in the past week. Merchants are seeing a more than adequate supply of high quality (31-3-35 and better) cotton in large volume as the Texas crop becomes available, resulting in the predictable shift to a buyer’s market.
What this means for growers is that while this season has rewarded selling smaller recaps into each rally, it is time to begin assembling larger recaps. Producers would be well advised to work with their ginners and local brokers to build larger recaps and strategic offering prices.
With that said, we are still seeing a strong basis, and the high quality of the Texas crop has produced an unusually high demand for base quality cotton.
For next week, the standard weekly technical analysis for and money flow into the Mar contract remain bullish, but the market’s recent overbought condition has largely evaporated. US net export sales for the week ending Dec 1 hold potential to be disappointing – but I have also thought that for the last two sales periods, only to be proved incorrect. I hope for the producer’s sake and the industry’s health, that I am proved incorrect once again.
Have a great weekend!
Louis W Rose IV, PhD has worked with cotton as a producer, consultant, analyst and trader. Rose holds degrees in Education, Agriculture, Plant Science and Business (MBA) from AR St Univ, OK St Univ and the Univ of Memphis, respectively. He has held positions with Aon Reinsurance and Cargill Cotton. Rose currently provides analytic services for various clients and media outlets and is the co-founder of Risk Analytics, LLC, producers of The Rose Report, which he authors. For more info on The Rose Report or analytic services, please visit: www.rosecottonreport.com