JANUARY 5, 2018

MARKET STUMBLES BUT RECOVERS

Cotton futures began the year with their biggest one-day decline in months as March cotton dropped 1.13 cents to settle at 77.50 cents per pound Tuesday. However, the decline was short-lived, and Wednesday and Thursday saw the market turn back upward. On Friday, immediately after the release of the Export Sales Report, March futures spiked higher, making a new life-of-contract high at 80.05 before falling back sharply. Open interest rose 6,429 contracts to 285,426 from 278,997 last week. Open interest has been higher only a few times, most recently during a three-day stint last February. Beyond that, open interest was only higher in March 2008, which puts many traders on edge. The price spike that spring put many merchants out of business.

EXPORT SALES CONTINUE FIRM

Export Sales were nothing spectacular, but they were still much better than they needed to be despite higher prices. Although the futures market ranged from 77.17 to 79.45, exporters were still able to book net new sales of 193,900 Upland bales for this marketing year, and 93,200 for next. The cotton marketing year runs from August 1 to July 3, which means we still have 30 weeks to hit USDA’s current export target of 14.8 million bales. By the End of December, export commitments have averaged 67 percent of the final marketing year total.  With last week’s sales, U.S. export commitments are already at 78 percent of the full-year forecast, which implies USDA’s current export estimate is too low.

UPCOMING REPORTS TO WATCH

In addition to the January World Agricultural Supply and Demand Estimates (WASDE), USDA will release its Annual Crop Production summary next Friday, which is usually the last U.S. production estimate for a few months. To keep a handle on where the final size of the U.S. crop is likely to land, traders will be closely watching daily classing data, public warehouse data, and the January 22 Cotton Ginnings report. USDA will resume updating crop production estimates later in the spring, but the final figure rarely deviates more than 2 percent from January’s estimate.

COTTON CLASSING AND THE CASH MARKET

Cash markets have remained active as most producers are still looking to sell what remains of uncommitted cotton as soon as classing becomes available. USDA has classed over 16.2 million bales as of January 5, and if the current production estimate is accurate, there are still 4.5 to 5.0 million bales left to class. Unfortunately, the price for low micronaire recaps has not followed the market higher, and many producers who did not contract or commit their cotton to pools have been unable to get a workable price.

SPECS CONTINUE TO SUPPORT THE MARKET

Speculative traders continued to add to their futures purchases last week and now hold one of the largest long positions ever. Once the decision is made, speculators tend to sell out of their purchases rapidly. Normally that is not much of a concern, but the size of the speculative long position suggests the market will be vulnerable to abrupt drops, as was the case today, should any speculators suddenly sell out of their futures for whatever reason. However, speculators are still finding comfort in the size of the on-call sales commitments, which also remain at record high levels. Their hope is that mill fixation will take over futures buying and keep the market moving higher.

With USDA’s next set of reports coming next Friday, most market participants will be working hard to come up with decent forecasts of what USDA will say. The WASDE report is likely to get the most attention, as traders attempt to discern where global changes to supply and demand may affect market prices. The Export Sales report will be released at its normal time at 7:30 a.m. Central Time on Thursday and will provide some additional guidance. Nevertheless, cash markets are likely to continue dominating traders’ daily focus.

IN THE WEEK AHEAD:

• The Export Sales report will be released Thursday at 7:30 a.m. Central Time.
• The CFTC Cotton On-Call report will be released Thursday at 2:30 p.m. Central Time.
• The Annual Crop Production summary and WASDE reports will be released at 11:00 a.m. Central Time on Friday.
• The CFTC’s Commitments-of-Traders report will be released Friday at 2:30 p.m. Central Time.