Cotton bulls have been winners for 6 consecutive weeks, with the Mar contract gaining 647 points over the period – 131 points for the week ending Dec 1. The Mar – May spread is at 49 points, or roughly 1/3 of full carry.
For the first time in a while we took some down time last week – and it had nothing to do with the fact that we had ultimately expected the market to move a bit lower on Thanksgiving week Vs the 108 point gain the Mar contract actually posted. Really.
Earlier, we relayed that our weekly cotton and grain models predicted Mar futures would once again post a weekly gain – although we also voiced our doubt that such would occur, what with increased producer selling and the market running well ahead of where recent export business had been conducted. The models turned out to be correct.
Demand continues to underpin our market and with the breakout above the 70.00 level, CFTC data has shown that specs are all too happy to ride the wave. ICE certificated stocks stubbornly remained below the 50K mark as futures began to build some carry and merchants and marketing associations hustled to meet sales commitments. This likely bolstered the non-commercial’s confidence in getting longer.
Demand remains quite strong. US export sales for the week ending Nov 16 were around 285K bales, including ELS sales, and this was 250% of the weekly pace required to match the USDA’s 14.5M bale export projection. Shipments remain slow, but will ultimately improve, although the USDA is not likely to give a nod to notions of higher than currently projected exports until we shipment quicken noticeably.
Overall, we think that the market has risen to a level where purchasing US cotton – either outright or on call is becoming less attractive.
Pakistan (a very strong customer over the three most recent sales periods) has lifted a ban on imports of Indian cotton at the urging of its textile sector. While it is true that the evaporation of the ban is accompanied by rather strict phytosanitary restrictions, this scenario sets the stage for smaller purchases – and even sales cancellations – over the near- to medium-term. China also reportedly cancelled some US business this week.
Producers need to consider these factors next week. Spot brokers have done substantial business this past week, with the combination of a market rally and a still strong basis proving attractive for sales. We think these sales are well advised, and continue to believe that it makes more sense to sell cotton into a strong basis on a rally than it does to hold in hopes of higher levels after the first of the year. We can’t rule out a continued rally, but we think it makes more sense to take advantage of a rally with call options than it does by paying warehouse tariffs.
For next week, the standard weekly technical analysis for and money flow into the Mar contract remain bullish. However, the market is overbought considerably on a daily basis and will soon approach an overbought condition on a weekly basis, as well, if the market continues to move higher. The market will likely begin to factor in expectations for the upcoming WASDE report, scheduled for release on Dec 12, next week.
Have a great weekend!