JUNE 8, 2018

COTTON ON A ROLLER COASTER RIDE, WEATHER CONCERNS MOUNTING

Cotton prices performed a major head-fake this week, falling dramatically Monday and Tuesday but reversing in even more dramatic fashion Wednesday and Thursday. July futures bounced off a low of 89.35 cents per pound while December dipped to 88.40 cents before turning back upward. The rally continued through Friday as July rallied to a high of 95.84, just shy of its life-of-contract high at 96.40 set on May 30. December also made new life-of-contract highs on Thursday and Friday, trading to 94.82 early Friday morning. With many new traders streaming in the past few weeks, open interest has set a new record. As of Monday’s close, the number of open contracts in the market had reached 322,253, the highest ever.

DROUGHT CONDITIONS CONTINUE

Recent rainfall in West Texas has done little to alleviate drought on the High Plains. Heat and high winds have undone the precipitation, and relatively little dryland cotton has emerged. Some irrigated fields have even been blown out and required re-planting. This week’s Crop Progress report showed that 76 percent of cotton was planted, right on the 5-year average. Unfortunately, the initial condition readings lagged significantly. Only 42 percent of cotton surveyed rated good or excellent versus 61 percent last year. Kansas, Oklahoma, Arizona and Virginia’s conditions are significantly poorer than last year. In Texas, only 28 percent of the crop was rated good or excellent versus 53 percent on June 5 of last year.

WASDE REPORT NEXT WEEK

The increasing probability of high Southwest abandonment has market watchers expecting lower U.S. production, but the U.S. is not alone in facing production challenges this year. Insufficient water has delayed planting in Northern India and Pakistan. India also faces an uncertain impact from an unresolved pink bollworm issue. China and Uzbekistan’s main growing regions also have had inclement weather. Even Australia expects to grow less cotton next year with less water available for irrigation. The prevailing market sentiment is for the USDA to lower its forecast for world production in next week’s WASDE report.

NEWS FROM CHINA

In addition to the prospect of lower supply, the world’s mills also face the threat of greater competition from China. The China Cotton Association released a statement that, in communication with the government, it believed the recent price spike in the Chinese cotton market, where domestic cotton futures had jumped more than 20 percent since early May, did not reflect the actual supply and demand situation in China. Among their justifications was that the government “in the near future” could release more quota for importing cotton, allowing mills to buy an additional 2.3 to 4.5 million bales of cheaper foreign cotton, further increasing competition in the export market.

EXPORT SALES SLOW

Weekly export sales slowed this week, and sales for 2017-18 were a marketing-year low. China was notably the largest buyer, accounting for nearly half of new sales. The market seems to have outpaced mill demand, but there was good news in the pace of shipments. For the week ending May 31, 576,400 bales of Upland cotton left U.S. borders, which is a marketing year high and the third highest shipping week on record. Strong shipments imply 2017-18 exports will beat USDA’s current 15.5-million-bale estimate, lowering beginning stock and tightening supply for next year.

VOLATILITY LIKELY TO CONTINUE

The week ahead does not seem to promise much relief to sharp price movements. In addition to the constant weather watch and approaching end of the July futures contract, traders will be closely watching the release of the June WASDE report on Tuesday, June 12, the morning after President Trump’s meeting with North Korea’s Kim Jong Un in Singapore. Trade disputes and tariffs will continue to roil markets as well, providing additional volatility. In short, the volatility is not over yet.

IN THE WEEK AHEAD:

• Crop Progress will be released Monday at 3:00 p.m. Central Time
• On June 12, President Trump meets with Kim Jong Un in Singapore
• The June WASDE Report will be released at 11:00 a.m. Central Time on Tuesday
• 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 CFTC’s Commitments-of-Traders Report will be released Friday at 2:30 p.m. Central Time