MARCH 23, 2018

MARKET CONTINUES TO PULL BACK, REMAINS RANGE-BOUND

May futures started the week by continuing last Friday’s decline. Prices touched their lowest levels in a few weeks on Monday and seemed like they would keep moving lower Tuesday morning. Nevertheless, just after touching the week’s low at 80.95 cents per pound, the market rallied sharply. The gain was enough to push May prices back up to 83.35 cents, which erased Monday’s losses.

Wednesday morning continued up, marking the week’s high at 83.86; however, futures began to wind back lower, finishing the week in the middle of their trading range. New crop (December) futures were much less volatile, with prices constrained to a narrower range from 77.22 to 78.24 cents per pound. With the exception of Tuesday, trading volumes were relatively low, and the number of open contracts in the market did not change much week-over-week.

GINS STILL RECEIVING CLASSING DATA

It is hard to believe that USDA is still classing the 2017 crop even as producers are deciding what they will grow for 2018. With 23 Texas gins and all of the Oklahoma and Kansas gins still getting classing, there were 116,836 samples classed this week. Adjusting for 480-pound average bale weight and adding in Pima, the U.S. looks on track to hit the USDA March production forecast of 21.03 million statistical bales.

DROUGHT MAKES FORECASTING UNCERTAIN

Next year’s production is far more uncertain. Drought has expanded and slightly intensified in West Texas and Western Oklahoma, which is making 2018 production estimates especially uncertain. The forecast holds out hope for modest rains next week, but the National Weather Service’s seasonal outlook still has a significant dry bias beyond that. The threat of high abandonment and lower yields has helped support December futures. We hope that the forecasted storm moves west but caution that significant rainfall could also push December futures lower.

EXPORT DEMAND CONTINUES

U.S. cotton continues to sell at an excellent pace in the export markets. The Export Sales Report for the week ended March 15 showed net new sales of 338,400 bales for the 2017-18 marketing year and 147,500 for next. Actual shipments also were strong at 425,100 bales, which is more than shippers need to average to hit USDA’s 14.8 million bale target. Twenty different markets were buying, which shows broad-based demand. As things stand now, demand remains strong for U.S. cotton.

Cotton prices seemed ready to rally after seeing the delayed Export Sales Report released on Friday due to the bad weather in Washington DC this week; however, several factors seem to be weighing on cotton markets. For one, China’s reserve auction has disappointed market analysts. The daily volumes sold and the prices paid have not yet matched previous years, which many are interpreting as a sign of weaker demand. Nevertheless, China did have a larger than expected crop, so the relatively poor auction performance may change as mills work through this year’s larger free supplies.

POSSIBLE TRADE WAR LOOMS

On a broader scale, all markets seem worried about a potential U.S.-China trade war, in which both countries progressively increase protectionist policies. President Trump has ordered the U.S. Trade Representative to level $60 billion in import tariffs on Chinese goods.  China responded with a much smaller list of potential new tariffs, which so far does not include cotton. The exact U.S. tariffs will not be announced for several days, but the uncertainty has driven many traders to sell “risk” assets like stocks and commodities. The impact on cotton, or anything else for that matter, is yet unknown, and traders of all kinds, especially agricultural exporters, will be watching the situation as closely as possible.

PROSPECTIVE PLANTINGS

Aside from tariffs and interest rates and every other sort of outside shock that could hit the markets, cotton traders will turn their focus to next Thursday’s Prospective Plantings report, which will contain USDA’s planted acreage estimates for the 2018-19 marketing year. These figures will be the base that USDA will use to assemble the May 2018-19 Production, Supply and Demand estimates, which kicks off monthly estimates for the next crop year. Previous estimates have ranged from 13.1 to 13.3 million cotton acres. Significant deviations from that range could surprise traders and move the market.

IN THE WEEK AHEAD:

• Prospective Plantings will be released March 29 at 11:00 a.m. Central Time
• 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 Futures Market will be closed Friday in observance of Good Friday.
• The CFTC’s Commitments-of-Traders will be released Friday at 2:30 p.m. Central Time.
• 2018 Crop Progress Reports will begin April 2.