JUNE 22, 2018

THREAT OF TRADE WAR CONTINUED TO WEIGH ON COTTON PRICES EARLY THIS WEEK

• West Texas Rains Too Little, Too Late
• Other Countries’ Crops Off to Rough Start
• Export Sales Cancellations Finally Show Up, Net Reduction of 112,400 Bales, More to Come?
• Prospects for More Market Volatility
• 2018 Acreage Report Coming Soon

Last Friday’s sharp decline led to follow-through selling Monday and Tuesday. July futures tumbled from a high of 90.55 cents per pound on Friday, to a low of 83.10 Wednesday, but July futures are no longer the market’s focus. Open interest in July futures has shrunk to just 3,128 contracts with traders aggressively clearing out positions ahead of July expiration. Unfortunately, December futures were about the same as July. New crop futures fell from 89.52 cents on Monday’s open to a low of 82.94 Wednesday. December’s open interest declined 13,578 contracts to 184,858 this week, which is still exceptionally high at this point in the year.

POTENTIAL FOR LARGE ABANDONMENT NUMBERS

The U.S.-China “trade war” is still the central reason for the market’s fall, but last weekend’s rains also had many traders expecting to hear better production news from West Texas. Unfortunately, the rain proved too late for a large portion of the dryland acreage, and insurance adjusters are already in the fields. This week’s Crop Progress report illustrated the desperation in the region. As of last Sunday, USDA had rated 39 percent of Texas cotton as poor or very poor, up 8 percentage points versus last week. Despite the recent rains, abandonment in the Southern High Plains is likely to be very high. Monday’s Crop Progress report will help adjust traders’ assessments of crop potential.

CANCELLATIONS RESULT IN NET REDUCTION

The Export Sales report for the week ended June 14, the day before the U.S.-China tariff escalation, showed mixed results. Sales for 2017-18 showed a net reduction of 112,400 bales due to large order cancellations to Vietnam (69,700 bales), Indonesia (50,000), and Hong Kong (26,400) outpacing new sales. Next marketing year sales of 295,400 bales seemed to be excellent news, but closer inspection shows that 211,700 of the total was to China. Unless the trade dispute is settled quickly, these sales may be cancelled. Next week’s Export Sales report will shed some light on how the trade dispute is impacting demand.

DEMAND FOR U.S. COTTON SHOULD CONTINUE

In the long run, the mills of the world will need U.S. cotton. World production currently is forecast at 120.4 million bales for 2018-19, but the U.S. is not the only major producer off to a rough start. Indian sowings are behind schedule because of a late monsoon in the key exporting region. Pakistan also has been struggling to plant its acreage target, and Australia’s prospects for the next crop are dim given current dryness and limited irrigation reserves. Even if China imports less U.S. cotton, 2018-19 consumption is forecast to exceed production by nearly 5 million bales. U.S. cotton is far less dependent on China than it used to be.

NEXT WEEK’S FOCUS

Next week’s Crop Progress and Condition and Export Sales reports will get central focus as market watchers attempt to assess the crop and the impact of the trade dispute. Also, USDA will be releasing the 2018 Acreage report at 11:00 a.m. Central Time on Friday. The report will officially replace USDA’s Prospective Plantings figures in future crop production reports, including the July WASDE report. Traders will be busily re-basing their forecasts after the release, and any significant deviation from the Prospective Plantings could add more volatilityto the market.

IN THE WEEK AHEAD:

• Crop Progress will be released Monday at 3:00 m. Central Time
• The Export Sales Report will be released Thursday at 7:30 a.m. Central Time.
• The CFTC Cotton On-Call Report to be released Thursday at 2:30 p.m. Central Time.
• USDA releases the Acreage Report Friday at 11:00 a.m. Central Time.
• The CFTC’s Commitments-of-Traders will be released Friday at 2:30 p.m. Central Time.