ICE Dec cotton finished the week very near unchanged, despite trading significantly in both directions Vs last week’s settlement, finishing at 88.12. The Dec – Mar spread finished the week near flat, inverted at 4 points.
Market watchers looked for explanations behind this week’s trading action, particularly with respect to Friday’s retracement to almost 86.75 on Dec. In short, the trade war with China continues to weigh on most agricultural markets; additionally, the relatively long-standing gap between 89.50 and 90.00 on Dec was filled this week, which likely prompted some technical traders to take profits, or even sell the market short. Crude oil prices also retreated this week – an occurrence with which cotton futures often sympathizes.
The US will apparently not realize the USDA’s export forecast of 16.2M 480 lb bales; it will likely be mid-Aug before the total of 2017 crop, plus a portion of the 2016 crop rises to 16.2M bales. The immediate effect of this will likely be a higher USDA projection of domestic ending stocks for the 2018/19 marketing year – if the current US production estimate holds, which we doubt. Otherwise, we expect that relatively light domestic demand for raw cotton, combined with an expected continuance of little to negative carry in the futures market, will result in USDA projected ending stocks (updated monthly in the WASDE report) to be effectively (and consistently) overstated.
Internationally, India’s monsoon continues to slow and it is now apparent that total rainfall this season will fall well below the long-term average. And the pink bollworm is again making itself know across portions of the country’s largest production areas. Hence, we continue to think that the USDA’s current production projection for the nation is unduly optimistic. Across all nations, spot prices for synthetic fibers continue their trek northward. All of these facts should lend underlying support to ICE cotton futures.
The USDA will release its Aug WASDE report at the usual time of 12:00 PM, ET on Aug 10. This will be the first report of 2018 that will feature results from the USDA-NASS objective yield survey; hence the Aug report should provide a fairly accurate estimate of abandonment across the West Texas region. The current consensus is for a tightening of both domestic and aggregate world balance sheets, and we concur.
We recently had a conversation with a well-placed private pool trader, and he made the comment that if he’d followed one particular commentator’s advice all year long, he’d be somewhere north of 165% priced at this point. We sympathize and concede that the same is likely true if you were to do a careful review of our pricing suggestions for the past year. In our defense, it is worth remembering that columns like ours are frequently read by producers who haven’t yet hedged their crop, and it’s occasionally hard to find new ways to repackage the same advice when fundamental and macro conditions are steady over the long run.
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With that said, a review of the fundamental situation supports a return to the low to mid 90s in the medium term, and that’s a great place to price cotton, whether you are doing so with contract, options, or futures. We do see the likelihood of a stronger basis for quality cotton at harvest, and a reasonably solid floor under Dec in the low 80s.
The obvious wild card, as noted in the 2nd paragraph, is the ongoing trade negotiations between Washington and, well, everyone. Given the unpredictability of the negotiator-in-chief, we’re at a loss to predict where those negotiations could go on a daily or weekly basis. We do take some solace in noting that while our trading partners aren’t always friendly to US concerns, they do tend to be predictable. We hope you’ve followed enough of our (or our fellow commentators’) advice to be better than 50% priced at this point, and that you can watch the diplomatic fireworks from a distance. If not, next week would be a fine time to talk to your broker.
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For next week, the standard weekly technical analysis for and money flow into the Dec contract remain supportive to bullish, but it will likely be the Aug WASDE report – and market participant’s adjustments ahead of its release – that have the final say in next week’s ultimate market movement.
Have a great weekend!
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