JANUARY 12, 2018
FUTURES RALLY THURSDAY TO LIMIT-UP SETTLEMENT
It is an understatement to say the futures rallied this week. Monday’s trading was slightly lower, but selling stalled on Tuesday. After a better-than-expected export sales report Thursday morning, futures rocketed higher to close at “limit up”. The exchange does not allow cotton to trade beyond a pre-stated price limit on any given day, and “limit up” means the bids have reached that level. Prices continued higher into Friday’s session and reached 84.65 cents per pound in overnight trading. Nevertheless, buyers seemed to have exhausted themselves, at least for this week, before the release of today’s government reports, and prices began to drift back down in early morning trading. For the week, prices ranged from 77.93 to 84.65 cents per pound. Volume was very heavy, and the number of open futures contracts expanded 10,050 contracts to 295,476, which is the highest in almost 10 years.
JANUARY WASDE REPORT DISAPPOINTS
If bets on a sharply tighter balance sheet for U.S. cotton were fueling this month’s rally, then today’s World Agricultural Supply and Demand Estimates (WASDE) were a disappointment. World production increased by about 1.0 million bales to 121 million, while consumption increased 1.2 million to 120.8 million bales, and world ending stock were lowered just 200,000 bales. Big international adjustments included 1.4 million addition bales of production in China, along with 1.0 million bales higher consumption and 300,000 bales fewer imports. Exporter crops were lowered in India by 200,000 bales and Australia by 100,000 bales, but lower exports from West Africa and Argentina mostly offset China’s lower imports. In summary, the supply and demand picture shows a healthy increase in both consumption and production, which does little to explain why the market moved more than 10 cents higher over the past month.
U.S. PRODUCTION SUMMARY
USDA released the Crop Production Annual Summary at the same time as the WASDE report, which shed some light on which states contributed to lower U.S. production. The forecast for total U.S. production was reduced 177,000 bales to 21,263,000. By region, the Delta’s production was increased by about 20,000 bales, while the Southeast, Southwest, and Far West were revised lower. Texas production was basically unchanged (Pima production down 3,000 bales to 23,000), but Oklahoma was revised down 40,000 bales to 1,060,000. With U.S. production revised lower, USDA also decreased its “Loss” estimate by 77,000 bales. After all the changes, the U.S. ending stock was only 100,000 bales lower.
IMPRESSIVE DEMAND CONTINUES
Fortunately, speculative buyers have not been the only ones buying the market. Despite higher prices during the reporting period, foreign mills continued to order U.S. cotton at an impressive pace. Last week’s net new sales totaled 274,500 bales to 15 different markets. Total U.S. commitments have hit 80 percent of USDA’s export target, which remains far ahead of the average pace at this point in the marketing year. Given the market’s surge higher after the export sales report was released, it is safe to say that many traders were expecting USDA to lift its U.S. export estimate. It remains to be seen whether the market will disagree with USDA, but the lack of an upward revision was a disappointment to buyers.
Speculative buyers have maintained their advantage over mills. Mills’ commitments to fix prices against the March futures contract has declined but remains very high. The speculators’ bet that mill buying and fixation would take over have profited them well. At this point, there are only a few things that would trigger speculative selling. They include a large quantity of certificated stock, which is currently very low, export sales cancellations, or a fall through price levels that would trigger money managers to cut losses. Accordingly, traders will be closely watching next week’s export sales report, the daily certificated stock levels, and minute-by-minute price charts for any sign that speculators will begin to liquidate their large long position.
IN THE WEEK AHEAD:
- The Export Sales report will be released Friday 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 CFTC’s Commitments-of-Traders report will be released Friday at 2:30 p.m. Central Time.