For weeks now new crop prices have traded in the mid 70’s, the beneficiary of the long talked about standoff between the trade’s large short position and the spec’s greater long position. December’s been drug along for the ride, as old crop prices have climbed ever so close to 80 cents.
Inevitably, at some point soon, the December futures contract will take on a life of its own. The first glimpse of this came last week when USDA released its cotton planting intentions report. It revealed an estimated 12.2 million acres of cotton would be planted in the U.S. this coming year, a 21% increase over the previous year.
Regionally, the southwest leads the way expanding acreage by 24%, an additional 1.25 million acres. With cotton prices 20% higher than a year ago, an increase in acres took no one by surprise, including the market. However, USDA’s estimate significantly exceeded those made by other agencies.
To put more simply, after accounting for normal yields and abandonment, this could equate to an 18 million bale crop. With a crop of this size, consumption is going to be the key component necessary in maintaining today’s prices. The specs and funds certainly can’t be counted on to carry this market as they have since last August.
At some point they will head to the exit with profits in hand. The timing of this becomes the question even the shiniest crystal ball isn’t able to disclose.
Anticipating the report, last week the market fell 140 points, but did so on relatively low trading volume. Its rebound on Friday, immediately after the news, gave us some comfort that it had all but accounted for the increase ending the week at 74.09, up 50 points on the day.
In similar action, this week has seen December shed another 70 points, closing Wednesday at 73.39. This certainly should grab one’s attention, but before getting too alarmed, the May contract and its tug on December seems to be more the stimulus than anything to do with USDA numbers.
Despite some minor spec liquidation and some rolling of May futures into July, the major uptrend line is still intact and the forces that have supported this market for weeks are still in place. This can be seen in subsequent short covering by the trade lending support.
Also, total open interest dropped only 300,000 bales for the week to 27.7 million, an extremely high number for this time of year and one which clearly indicates that the standoff continues with the mills forever painting themselves into a corner by further delaying pricing until July. Keep in mind, the dust will eventually settle on this scenario by the end of June if not before.
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Once old crop is priced, new crop fundamentals will come to bear, as we mentioned earlier, and it’s very difficult to remain bullish with the potential for such a large crop. Optimistically, if we could somehow duplicate last year’s performance, a crop of over 20 million bales is very possible. Given today’s technology, favorable weather patterns, and adequate soil moisture, I wouldn’t bet against it.
On the demand side, there are some early indications demand for U.S. cotton is strengthening. Last week’s export sales report was 391,000 bales of which 121, 000 were for new crop. In the last six weeks alone we have sold in excess of 2.5 million bales which now have our total exports to date matching USDA’s 13.2 million bale export estimate with four months remaining in the marketing year.
Where do we go from here? Hopefully most of you have already priced a portion of your crop on your own or as part of a coop. Going forward, the market will no doubt react to the ebb and flow of the crop throughout this season. Look for any hiccups in production, either here or abroad, to provide us additional buying opportunities.
We are very optimistic another excellent crop year is in store for 2017, but not quite as confident in demand maintaining its current pace. With this in mind, today’s price may look really good come next fall. Please call us at Choice Cotton, 334-365-3369, if we can be of any assistance in your marketing efforts.