JULY 20, 2018

LOW TRADING VOLUME KEEPS FUTURES IN NARROW RANGE

• Hot, Dry Conditions Take a Toll
• Demand for Physical Cotton Remains Strong
• Volatile Foreign Exchange Rates Affect Pricing
• Traders Remain Vigilant

Cotton futures trading was inactive this week. Daily volumes were the lowest in months, and prices were constrained to a relatively narrow band. December futures ranged from a low of 86.80 cents per pound to a high of 88.80 for most of the week. New buyers seemed to be entering the market as the number of open contracts increased 3,300 contracts to 258,467. Friday morning saw prices dip after CNBC released an interview with President Trump in which he signaled a willingness to apply even more tariffs on Chinese imports if they do not begin to make concessions. December futures briefly fell to 86.20 cents before returning to the week’s trading range.

SOUTHWEST CROP CONDITIONS DETERIORATE

Monday’s Crop Progress and Condition Report helped justify last week’s rally. Nationally, the cotton crop has several bright spots. Crops in Tennessee and Alabama, for example, have very high good or excellent condition ratings. Squaring and boll setting also are ahead of their average paces, which signals the crop is generally on time. However, the report also showed a terrible deterioration in the Oklahoma crop. The share of Oklahoma cotton rated good or excellent fell 22 percentage points to 16%, and the share in poor and very poor condition jumped 14 percentage points to 41 percent. Unfortunately, extreme heat and a general lack of meaningful precipitation are taking a toll on the Southwest crop.

EXPORT SALES GOOD, SHIPMENTS SLIP

Export sales continue to show strong demand for U.S. cotton. New sales for the remainder of the current marketing year (ending July 31) and for next marketing year totaled more than 260,000 bales of Upland cotton. Large buyers for the upcoming season included Vietnam (93,400 bales), Pakistan (36,400), Malaysia (26,900) and China (24,300). The new sales to China, rather than cancellations, were unexpected. On the other hand, shipments of cotton slowed below the pace needed to hit USDA’s newly-revised estimate for 2017-18 total exports. Shipments will have to be surprisingly strong in the next three reports to hit USDA’s target. Nevertheless, whether the cotton ships before or after July 31 is not terribly important. U.S. export sales continue to reflect the world’s need for U.S. cotton.

STRONG DOLLAR AFFECTS COTTON PRICING

Factors beyond cotton’s own supply and demand also are affecting the market. Foreign exchange rates have been volatile, which changes pricing for international traders. For importing countries, the strength of the U.S. dollar makes imports more expensive than domestic supplies. China, Turkey and Pakistan have seen large depreciations over recent weeks, but so have India, Brazil and Australia. As exporters, the latter set of countries has also benefitted from weaker currency, giving them a slight advantage versus U.S. exports.

TRADERS WATCHING FOR POLITICAL OR ECONOMIC NEWS

Cotton futures seem to have relaxed into their usual slow, summertime pace. There is not much information scheduled to re-orient the market next week other than the usual Crop Progress and Condition report and U.S. Export Sales report. Most will be expecting a quiet week ahead, but the continuing prospect of a political or economic shock will keep traders’ vigilance high.

IN THE WEEK AHEAD:

• Crop Progress will be released Monday at 3:00 p.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.
• The CFTC’s Commitments-of-Traders report will be released Friday at 2:30 p.m. Central Time.