Cotton bulls found their way into the win column yet again, extending their weekly streak to seven, with the Mar contract gaining 44 points on the week (nearly 700 for the streak). The Mar – May spread was very near unchanged at 48 points.
The weekly win looked more impressive than it actually was – especially considering trading action post the weekly export release on Thu, when the market exploded to trade 218 points on its weekly low of 72.10. However, being the cliché abusers that we are, a win is a win. We also understand that a fair number of US producers have taken advantage of the market’s holiday graces to offload a significant portion of this season’s crop into merchant hands.
One final note regarding the latest weekly win: our models again predicted Mar futures would post a weekly gain – although we (again) voiced our doubt that such would occur. The models turned out to be correct, as they often do when emotionalism finds its way into the market.
The pervading question among most market watchers is, of course, “how long can the current rally endure?” Overall demand has weakened (including a spike in export sales cancellations) as futures prices have moved higher. The on-call position of mills – who built much of their staggering position on purchasing attractive basis offers – suggests that the market’s desire for white gold may be somewhat sated, at least for the near-term. Further, given US quality concerns, attractive basis offers may become much harder to come by for mills, at least until all of bales are in the barn/warehouse and can be inventoried.
Still, the mill on-call position cold also serve to spark a blow-off top over the near- to medium-term, as we have seen in recent years, especially with regard to the July contract, when merchants and marketing associations mills will no longer afford spinners the option of rolling their position forward.
Over the very near-term, the USDA’s Dec WASDE report, scheduled for release at noon on the East Coast on Tue Dec 14, likely holds the keys for either a continued rally or a break.
USDA classing of this year’s crop has now (likely) passed the halfway point as 57% of estimated production has now been classed. This week, the USDA classing offices were busy, c1assing approximately 1.6 million bales, bringing the yearly total to around 12.2 million bales. Classing for the week was reported out of 492 gins compared to 543 for the season. Outside low micronaire, uniformity and bark issues in West Texas, which have not improved, the overall quality of this year’s crop has been good with nearly 75% of the bales classed tenderable against ICE futures contracts.
Harvest of this season’s challenging cotton crop is rapidly coming to an end. Most harvest operations are complete and more and more producers are finishing with each passing day. In general, the majority of cotton growers were pleased with their yields – the USDA estimated in November that the US would produce a record 900 lb/acre average. With the WASDE report set to be released on Tue, it will be interesting to see what the USDA does with its estimated average yield Vs Nov. A recent Bloomberg News industry survey evinced average estimates of total production at 21.33M bales, which is little change compared to the USDA’s Nov estimate of 21.38 million bales. We tend to have a more upward bias to those numbers as we expect total production to fall between 21.5 and 21.8 million bales, when all is said and done.
As noted earlier, producers have taken advantage of the futures move. With a much stronger basis than was available for forward contracting, the price on many of these recap sales has equaled or exceeded the very best prices available pre-harvest. We’d have to think long and hard to come up with times when the combination of strong spot basis and futures rally wasn’t a good time to sell, and our advice to sell into a strong basis stands for the coming week.
Another factor worth noting is that warehouse shipping backlogs have extended dramatically in the past couple of weeks, and merchants are paying attention. There is a strong premium being offered for bales in warehouses still offering prompt shipping schedules, and a similar discount being applied to cotton in slow warehouses. While producers have little control over warehouse operations, it is worth noting that your choice of gin and your gin’s choice of warehouse can have a substantial impact on your settlement price. Consider this as you make plans for 2018.
For next week, the standard weekly technical analysis for and money flow into the Mar contract remain bullish, with the market not yet overbought on a weekly basis. However, most of next week’s trading action is likely to be fundamentally based on information put forth in the WASDE report
Have a great weekend!