The bears posted a modest win on the week with the Dec contract giving up 76 points to finish at 87.08. The Dec – Mar spread weakened a bit over the course of the week and is now near flat at 12.
Market action this week, or the lack thereof, seemed to be motivated by domestic supply concerns and strong aggregate world demand for raw cotton on the lower end and fretting over trade disputes to the upside. The market spent much of the week consolidating post-WASDE gains, thus far managing to retain a large portion of them.
Demand for US cotton has slowed recently, but remains seasonally strong, especially given new crop production concerns. Total net sales and shipments against the 2017/18 MY for the week ending July 12 were off significantly Vs the previous sales period at around 14K and 246K running bales, respectively.
Shipments were just off the pace required to meet the USDA’s revised 16.2M bale export projection. Total sales against 2018/19 were also off Vs the previous sales period at around 225K running bales; sales against 2018/19 currently stand at a running total of around 6.4M 480lb bales.
China continues to purchase a significant amount of US new crop cotton, although recent announcements about an Indian export subsidy have the potential to trim that flow somewhat.
In economic and political news, rumors of trade negotiation progress with China wafted about the market this week but have thus far remained in the realm of innuendo and speculation. On a more concrete note, NAFTA negotiations are scheduled to commence again on July 26. Fed chairman Powell has stated that he expects additional interest rate hikes for 2018 to be implemented on schedule, but President Trump has publicly expressed his dismay at The Fed’s decision.
Domestic crop conditions remain a story of extremes. A day doesn’t go by without reports of abandoned, failed or drought stressed acres in Texas. Merchants with contracted acres in Texas are increasingly looking to other regions to fill their expected new crop sales and are working through their personal supplies of antacids and whisky.
On the other hand, the North Delta is in better shape than we’ve seen in several years. Despite a late start, the crop is 10-14 days ahead of schedule with a very encouraging boll count. While we all know the danger of counting unhatched eggs, it seems reasonable to expect a better than average Mid-South crop in 2018.
A combination of strong world consumption and supply concerns have led some commentators to argue for a return to the mid-90s for the Dec contract, and we see no reason to disagree. Although the Indian subsidy scenario does put the US in a residual supplier mode, we believe this could be a temporary issue, and note that the Indians have been unreliable suppliers in the past.
Given this, we believe producers can set a target in the low to mid 90s for forward contracting and can carry a percentage of their uncommitted cotton into the fall confident of strong basis and futures at current or higher levels. As always, this advice is best paired with a good hedge in the option pit.
For next week, the standard weekly technical analysis for and money flow into the Dec contract remain supportive to bullish. It now looks as if the market will continue to consolidate until it receives convincing news of one type or another. Do recall that, most often, the longer a market consolidates the larger the eventual rally or break.
Have a great weekend!