The Bulls made it three in a row over the holiday-shortened trading week as the projected path of Irma continues to turn more ominous for major cotton producing regions. The ICE Dec contract gained 271 points on the week while the Mar gained 241 – moving the nearby spread out to 118. Dec has gained 731 points over the last three weeks.
It would seem that Irma’s threat to US cotton production and quality can claim most of the credit for the market’s gains this week, although weakening US currency did not hurt. Still, US export sales were down around 50% for the week ending Aug 31. An approximate 1.3M bale increase in mill on-call commitments was obviously overloaded with sales of foreign cotton hedged on ICE contracts.
Significantly higher acreage will be applied to the USDA’s equations in estimating this year’s US production. At this time, most analysts (us included) believe that the Harvey will result in increased production potential being offset by abandonment estimate increases and yield debits. Still, the market may discount the USDA’s domestic estimate somewhat, depending on Irma; given the timing of Harvey’s landfall, the collecting field data should have been mostly complete in the affected areas and shoe be reflected within the Sept report.
The question for producers at the end of the week was whether the “hurricane rally” covered the full potential damage, or whether there is more rally to come next week.
Marketing decisions were complicated by a forward basis that widened in response to volatility. This left producers debating the relative merits of contracting with a wide basis in a strong market Vs selling quality recaps to a likely narrower basis in a potentially weak market. If one adds currency considerations, North Korean missiles, and the Trump administration’s desire to renegotiate trade agreements, producers could be forgiven if they sought solace in a glass of their favorite beverage this weekend.
There are still a handful of producers who continue to avoid pricing their crop. While we see the possibility of further gains in both futures and the basis, we cannot state strongly enough that two hurricanes have given these producers yet another opportunity to price cotton. Take advantage of this opportunity and start the week with orders in place on a portion of your crop.
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On the other hand, with heavy rain likely in GA, AL, SC, and TN, premium middlings are likely to be more scarce than they usually are as the early harvest season progresses. Producers in the high plains and outside Irma’s footprint may do well to have a portion of their crop they can sell on recaps for a quality premium.
For next week, the standard weekly technical analysis for and money flow into the Dec contract are bullish, but the market has now acquired an overbought condition. Irma and the USDA will likely be next week’s determining factors; business for US bales has cooled at prices well below where the market is currently trading.
Have a great weekend!
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