The bulls posted another win this week – this time in impressive fashion – with the Dec contract picking up 339 points to finish at 87.84. The Dec – Mar spread was near unchanged on the week, inverted at 22.
Market action this week was undoubtedly heavily influenced by bullish revisions to USDA official S&D balance sheets. We said in this space last week that we thought the July WASDE report had more bovine potential Vs grizzly; the magnitude of the bullish effect was significantly greater than we had imagined it could be.
With respect to CME grains, updated corn data was bullish with both domestic and world projected ending stocks for 2018/19 reduced 2% Vs June and with the aggregate world projected stocks-to-use ratio at the tightest in a quarter century. Wheat data was supportive at the aggregate world level, less so at the domestic level. Updated new crop projections for soybeans were out and out bearish.
Both the longer-term S&D scenarios for cotton and soybeans have us thinking if cotton infrastructure will require significant enhancements prior to the autumn of 2019.
In its July WASDE report, the USDA notably reduced its projection of aggregate world and domestic ending stocks for 2018/19 to approximately 77.84M and 4M bales, respectively. Projected carryout outside of China was reduced modestly Vs June to 38.62M bales while China’s ending stocks were projected nearly 5M bales off figures proffered within the June report. World consumption was projected noticeably higher Vs June at a record of nearly 127M bales while production was projected almost 300K bales lower at just above 120M.
Domestically, the USDA enhanced its projection of 2017/18 exports 200K bales Vs June to 16.2M bales. US production was projected 1M bales lower Vs June at 18.5M bales; national abandonment is projected at 22% with yield on harvest acres currently expected to be 845lbs/acre, which caused more than a few eyebrows to arch. Exports for 2018/19 were projected 500K bales lower at 15M bales.
Demand for US cotton remains respectable to strong even as the pace of shipments slipped for the week ending July 5, perhaps due, at least in part, to the Independence Day holiday. Total net sales and shipments for the period were approximately 127K and 282K RBs, respectively. Still, shipments were ahead of the pace required to meet the USDA’s 16.2M bale export projection. Total sales against 2018/19 were significantly higher Vs the previous sales period at around 253K RBs; sales against 2018/19 currently stand at a running total of around 6.15M 480lb bales. China purchased approximately 10% of new crop bales sold over the most recent assay period.
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Producers should get at least one more bite at the apple, with a growing consensus among market gurus that continued strong demand combined with production problems will push the Dec contract back into the 90s. It is important, however, to recognize the extent to which lower carryout is already figured into current prices. It would be foolish to argue that there is no chance for cotton to cross the dollar threshold at some point this year, but we think it would be more foolish to bank on it. The 93.00 – 95.00 range should be a very attractive level for producer fixations, with more bearish sentiments expressed in the option pit.
The US/China trade dispute continues to be a topic of conversation on every marketing call and in every coffee house in the cotton belt. Many respected commentators have argued that the net effect of tariffs is to make polyester less competitive, and ICE futures have certainly traded this as a bullish factor. We are somewhat leery, however, of the argument that the Chinese have blundered or don’t have a long-term strategy to unfold. If the Chinese have shown us anything in recent decades, it is that they are very good at taking care of China.
It does seem to be clear that they are currently in violation of WTO agreements, and we will be watching with interest to see how the world reacts to these violations. In the meantime, we’ll be fixing cotton and watching the weather in Texas.
For next week, the standard weekly technical analysis for and money flow into the Dec contract are supportive to bullish. However, recent bullish adjustments to official S&D balance sheets will likely have more influence over Ice futures than will technical factors, over the near-term at least.
Have a great weekend!
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