OCTOBER 26, 2018

A VOLATILE WEEK FOR COTTON AS OUTSIDE FACTORS DOMINATE

• Prices Rise, Then Fall Quickly
• A Contrast in Crop Conditions
• Assessing Hurricane Damage in Georgia and Alabama
• Poor Demand Continues

December futures jumped to a five-week high of 80.14 cents per pound on Monday. It is difficult to say what caused the rally since there was little fresh information about cotton released over the weekend. Unfortunately, prices came down as fast as they went up, and December futures posted large declines Tuesday and Wednesday that wiped out Monday’s gains. Prices touched 76.17 cents on Thursday before turning back to the upside with December futures leading the way. Although December futures had fallen to 1.80 cents lower than March, the relative strength through Thursday and Friday’s close, narrowed the gaps to as little as 1.08 cents. Daily trading volumes were consistently heavier than in recent weeks, and open interest gained 1,922 contracts week-over-week to finish at 263,853 as of Thursday’s close.

WEATHER CONTINUES TO HINDER SOUTHWEST CROP

It has been a deeply challenging year for producers across the Cotton Belt, and this week did not offer much of a break. Monday’s Crop Progress and Condition report showed decent advances in boll opening and harvest, at least for the eastern half of the Cotton Belt. This week’s weather continued to hinder progress in most of West Texas, Oklahoma, and Kansas. However, there is encouraging warmth and sun in the forecast this weekend. A light breeze, plenty of sun and a clear forecast is needed to dry out fields and keep up quality so harvest can continue.

HURRICANE DEVASTATES CROPS

Unfortunately, no amount of sun will undo the tremendous hurricane damage that Hurricane Michael wrought for Southeast growers. Over the past two weeks, Georgia’s crop condition has collapsed. On October 9, 59 percent of Georgia’s crop was rated good or excellent. As of Monday’s report, 49 percent was rated poor or very poor. Alabama showed similar but less extreme degradation. Hurricane loss estimates have sadly trended higher rather than lower. Combined with the poor harvest weather elsewhere, many private crop projections are shrinking fast.

WEAK DEMAND TRUMPS CROP LOSSES

With such damage to the crop, one would have expected prices to surge more, but demand has been nearly as bad as the weather. This week’s Export Sales report showed net new Upland sales of 40,600 bales for this marketing year as 101,800 bales of new orders were weighed down by 61,200 bales of cancellations, mainly from China (35,300) and Vietnam (19,300). While U.S. export sales have room to be slow, considering this year’s record start, the market considers U.S. export sales to be the best indicator of demand, mostly because it is the most transparent and reliable source of weekly export information. Since the market cannot see the active buying of other growths over the past month, poor demand for U.S. cotton seems like poor demand in general.

OUTSIDE FACTORS DRIVING THE MARKET

Until the harvest is more significantly along or currency-driven price competition disappears, it seems that most producers and mills are interested in staying on the sidelines. As physical traders have little to do between the high and low of this week’s range, speculative trading has played an oversized role in this week’s price action. In fact, the market has largely followed the big moves in the stock market, jerking up and down as the broader markets switch back and forth from “Risk On” to “Risk Off.” Until clarity forms around cotton’s own supply and demand situation, outside factors likely will continue to be the main driving force in day-to-day action.

IN THE WEEK AHEAD:

• Crop Progress and Condition will be released Monday at 3:00 p.m. Central Time.
• The CFTC Cotton On-Call report will be released Thursday at 2:30 p.m. Central Time.
• The Export Sales report will be released Thursday at 7:30 a.m. Central Time.
• The CFTC’s Commitments-of-Traders will be released Friday at 2:30 p.m. Central Time.