Rose On Cotton: Despite Demand, The Market Always Looks Darkest During The Selloff

    It was a painful week for cotton bulls, with the ICE Dec contact giving up 384 points Versus last week’s settlement, finishing at 81.39. The Dec – Mar spread strengthened somewhat on the week to (32) which is far less than full carry.

    The market took bearish cues early this week from continued evaluation of the Aug WASDE report, the U.S. – China trade spat, strengthening U.S. currency value, and sanctions against Turkey that will likely slow sales of raw cotton to the third largest U.S. export destination.

    On a brighter note, Chinese officials will travel to Washington later this month to try to hash out a trade agreement with the U.S. However, the situation in Turkey bears less optimism, with the nation’s leader vowing that it will continue to purchase oil from Iran, which has not set well with the powers that be here at home.

    Texas Production Remains Overly Optimistic

    With respect to the U.S. crop, we continue to believe that Texas production is overstated by USDA; to date, USDA-RMA crop insurance data shows this season’s loss ratio (indemnity/premium) for Texas at nearly 57% – almost all of which is due to abandonment. This figure is up 10 percentage points Versus last week. Conversely, the balance of The Belt has a combined loss ratio of less than 5%.

    We have driven across most of the northern Mississippi river Delta this week (from which we have posted pictures in our online crop gallery) and yield potential is, in general, excellent. Recent heavy rains have been mostly unwelcome for opening cotton, but there has likely been little damage to the crop, at this time.

    Total export sales and shipments against the 2018/19 MY for the week ending Aug 9 were lackluster, at best, at approximately 81K and 245K running bales, respectively. Both sales and shipments were significantly off the weekly pace required to match the USDA’s export projection of 15.5M 480lb bales.

    Still, though, cancellations were light and sales at this point of the year are normally not outstanding. The U.S. is 57% committed and 2% shipped Versus the USDA’s latest export projection.

    Let’s Put 80-Cent Cotton In Perspective

    Producers who follow the best-known cotton gurus know that many a plate of crow has been eaten this past week, and the consensus that existed for a 90+ Dec contract has vanished. Given that we were among that consensus, we’re still marveling at the perfect storm that took us from consolidation in the upper 80s to struggling to maintain low 80s.

    Perspective and patience are what we can offer this week. First and foremost, 80 cents is a historically strong level, and the forward contracting basis remains attractive. Producers who value sound sleep and happy bankers could do worse than fix a portion of their crop at current levels.

    Secondarily, the market always looks darkest during the selloff. If our numbers are correct, we should continue to see good demand, and any crop problems or easing of the current trade and political pressure should prompt a return to the mid 80s, if not higher. If producers are fixed to a comfortable level, we think the risk of holding further sales til the market improves or recaps are in hand is a tolerable risk.

    For next week, the standard weekly technical analysis for and money flow into the Dec contract remain bearish, but the market is also in a technically oversold condition. A significant amount of physical support remains under the current market.

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