The ICE cotton contracts had another up week with lead month Mar gaining 156 points, settling at 76.41 even as index funds began to roll longs into deferred contracts. May will likely be the defacto lead month the next time that we pen this column. The July – Dec inversion, at times, exceeded 400 points over the week’s course, and this should serve as an alarm to producers to strongly consider making new crop marketing plans. While an inversion is supportive to bullish over the near-term, the opposite is true for deferred contracts.
Demand for US bales for export over the week ending Jan 26 was off Vs the previous assay period, but also remained extremely strong, in excess of 330K running bales. Export shipments were a marketing year high of approximately 360K running bales.
But signals are mixed as to what export business the near future holds.
While the traditional price/quantity relationship holds for net sales to decrease as futures prices rise, basis levels (especially when weakening between merchants and mills) often mitigate the expected effect somewhat. While the US Dollar Index is a less reliable leading indicator of physical business of cotton than it is for many other commodities, it should be noted that the value of US cotton has increased nearly 6.5% since the first trading day of 2017 while the US Dollar index is approximately off 3.25% over the same period. Hence, it certainly seems that the price of cotton for our international customers is not as high as it “feels” (something effective traders are not advised to do). This feeling would, of course, be most poignant for those holding short positions.
The majority of the reason for the remainder of the difference in absolute ICE futures of recent is, we think, the heavy mill on-call position below the current market. We see little within a fundamental supply and demand analysis to suggest that we are about to enter a bull market -the opposite is far more likely.
That being said, ICE certificated stocks surged this week to just above 200K bales – a level that is not huge, but that also has not been realized in some time. Indeed, the cotton-laden aggregate merchant community seems to be signaling to stubborn spec longs that they could be the proud owners of physical cotton, should they continue to dig in their heels. Of course, such is not in any respectable speculative trader’s “Plan A” strategy when building a long position.
We also have to consider the competing crop price relationship between cotton, corn and soybeans. The Sept CME corn futures and spot prices do not compete well with cotton at this time, especially when considering volatility of corn yields across The Belt. Soybean prices are not bad, considering official supply and demand balance sheets, but they don’t cash flow as nicely as cotton, especially when one has to continue to make payments on existing pickers and other unique implements. Further consider the projected 2017 base prices for USDA-RMA revenue crop insurance contracts, and one can easily envision that the increase of planted area across the southern tier of states could well exceed that of 2016 Vs 2015.
Although our strictly fundamental analysis shows that the US will only need to sow around 10.8M acres of cotton to produce another projected 5M bale carryout into 2018/19 (given expected yields and average abandonment rates) we think the potential for 2017 cotton acreage to soar to 11.5M+ acres. If the current price relationships persist through mid-Mar such may even be likely – regardless of what the National Cotton Council and the USDA project at their respective annual meetings this month.
This, of course, would ultimately prove bearish, given that conditions across the majority of the cotton producing world are near average over upcoming harvest (southern hemisphere) and growing seasons. On a related note, Australia will likely have excess cotton to market in the not too distant future; this is also not bullish.
The USDA will release its Feb WASDE report on Thu, Feb 9 at noon, ET. The World Board has a policy not to tinker with the Jan USDA-NASS estimate until after the final ginning report for the season has been published – and then rarely unless the difference is seen to be notable Vs the Jan estimate. More often than not, they allow their sister organization to update the balance sheet in June with official final estimates.
In the most bullish scenario, the USDA could modestly enhance their projection of US exports, but I am not counting on it just yet. World estimates and projections seem unlikely to change a great deal Vs those put forth in Jan, barring significant backward revisions to previous balance sheets.
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As we mentioned earlier, the Dec contract is signaling producers to price a portion of their intended plantings. With that said, the current basis being offered on forward contracts don’t appear as aggressive Vs the past two seasons, and many producers are understandably nervous about overcommitting, given the number of variables that could change their intentions in the next 8-10 weeks, to say nothing of harvested yields.
Still, it seems prudent to us that producers consider hedging or booking 30-40% of their expected production against a Dec price of 7500 or higher. If local contract offerings seem lukewarm, put options will do an excellent job of protecting the price level and giving producers time to negotiate a more attractive basis.
For next week, the standard weekly technical analysis for and money flow into the Mar contract remain bullish, but the market is now significantly into overbought territory on both a daily and weekly basis. The rolling of longs forward by index funds will continue next week with the formidable Goldman roll scheduled to commence on Tue, Feb7.
We tend to think that prices will work lower ahead of the export and WASDE report releases on Thu and the Council’s acreage survey results dissemination on Sat per spec profit-taking.
However, this notion is by no means chiseled in stone.
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