AUGUST 3, 2018

PRICES ADVANCE, THEN FALTER ON MORE TARIFF THREATS

• Open Interest Increases, Indicating New Buyers Have Entered the Market
• Hot, Dry Conditions Persist in Texas, But Kansas a Bright Spot
• Australia and India Dry, Lower Crop Expectations
• 2018-19 Export Commitments Highest Ever, Increased Another 280,000 Bales Last Week
• Unpredictability High Due to Outside Forces, Next WASDE Difficult to Predict

Cotton futures traded to a six-week high of 89.98 cents per pound on Wednesday, but were unable to break above 90.00 cents. Fresh saber rattling on the U.S.-China tariff front pulled the market back down into the past few weeks’ trading range with prices dipping all the way back to a low of 86.76 today. Open interest has increased 8,954 contracts to 269,854 over the past week, which implies that new buyers had been feeding the rally. Daily trading volumesrebounded from the low averages observed for the past few weeks as the market moved higher.

HOT AND DRY CONDITIONS TO CONTINUE

Southwest production prospects seemed to be helping prices move higher. It has been mostly hot and dry in Texas, although a few areas did get helpful rains over the past week. Kansas seems to be a bright spot, and a lot of the Texas Panhandle seems to be doing well. Unfortunately, the 12 counties surrounding Lubbock and to the west received little to no precipitation. With more heat and very little rainfall in the forecast, hopes are not running high.

CROP CONCERNS ELSEWHERE

The Southwest U.S. is not the only major crop area facing big challenges this year. Australia’s crop area is in its worst drought in many years, and local trader expectations are for a much smaller crop. India’s monsoon also has under-performed predictions. The dryness already has delayed planting in key growing regions, and the lackluster rainfall has begun to reduce production estimates. Brazil and the U.S. Mid-South and Southeast seem to be the only major areas where analysts are hopeful that production will beat current forecasts.

EXPORT COMMITMENTS HIGH

Despite all the question marks surrounding supply this year, demand has not faltered. On this week’s U.S. Export Sales report, U.S. shippers committed another 280,000 bales of cotton to foreign markets this year as well as another 44,000 for the 2019-20 marketing year. Actual shipments have faltered somewhat at the end of the 2017-18 marketing year, meaning USDA may have to decrease its export estimate if the final weekly report is too low. Nevertheless, the U.S. is starting the 2018-19 marketing year with the highest level of export commitments ever.

OUTSIDE FORCES POSE A RISK

As far as most market watchers are concerned, tariff battles and outside market forces pose the greatest risk to cotton prices. Further escalation of trade disputes has put a damper on cotton prices, and there seems to be some nervousness on the part of investors that the stock market could suffer a pullback, which would temporarily affect commodity markets, too. Aside from watching those highly unpredictable risk factors, traders will continue to focus on the weekly crop condition reports and U.S. export sales. However, traders may be keeping their powder dry ahead of the August World Agricultural Supply and Demand Estimates (WASDE) report next Friday at 11:00 a.m. Central Time. The August WASDE report is notoriously difficult to predict, and unexpected changes could add significant volatility to the market.

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 August WASDE report is published at 11:00 a.m. Central Time on Friday.
• 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.