The bears were winners on WASDE week with the Dec and July contracts giving up 63 and 100 points, respectively. The July – Dec switch continued to weaken, but remains significantly inverted at 309.
The most compelling feature of today’s WASDE report may have been its inability to incite volatility in the new crop contract. I do not recall when ICE cotton has not traded a daily range of at least 100 points – something that neither Dec nor July accomplished today.
This is something akin to a “Trumpism” – a bit of truthful hyperbole, if you will. The truthful part is that I honestly do not recall when such has occurred, although I am almost certain that if I were to peruse the historical reams of data, I would find such an occurrence not nearly as rare as I have made it sound.
But, it is Friday, and in Memphis we are now well into the post meridiem. And I am just not that hard up for something to do – not as long as I have a stocked bar downstairs.
Back to the WASDE.
As the USDA sees it, world ending stocks for 2016/17 will tighten around 200K bales – but will still remain very loose at nearly 89.35M bales by virtue of an increase in expected world consumption. In its own right, this is encouraging. The USDA stood pat on the domestic balance sheet that it put forth last month.
With respect to the new crop balance sheet, the USDA foresees US exports contracting 500K bales Vs the May report due to an expected increase in world production. Projected world aggregate ending stocks were enhanced nearly 700K bales to 87.87M while US carryout was projected at a hefty 5.5M bales. Still, the USDA raised its projection of aggregate world consumption around 750K bales Vs May.
Demand is definitely the bright spot in today’s reports, and demand for US bales for export remains strong for both old crop stocks and outstanding for new crop. The market, with respect to the Dec contract at least, seemingly brushed off most of today’s bearish supply figures, perhaps as it collectively recalled that recent similar prognostications have not come to pass.
Given the current demand environment, it is difficult to imagine the US holding 5.5 million bales in July 18 if the US produces its typically high-quality crop.
Weather-wise, most of the reports we have received from the Lone Star state over the past week have been cautiously optimistic. The South Texas crop is progressing nicely and is currently considered to be in above average condition. A large portion of West Texas from the Panhandle down through the South Plains has received beneficial moisture, which has aided emergence and early plant growth. We consider the West Texas crop, in general, to be off to a good start – although not great.
Welcome sunshine has returned to the Midsouth and Southeast and it could not have come at a better time. With a nice stretch of dry weather in the forecast, fieldwork is resuming in an attempt to get caught up on fertilizer, insecticide and herbicide applications. The crop is in decent shape but could see much improvement with the return of “cotton growing weather”.
We have received a number of reports of acres being lost due to recent weather and insect damage in both the Midsouth and the High Plains, but to date we consider these reports isolated and not indicative of a widespread problem. That said, the next few weeks will be crucial for late or damaged crops and we will be keeping a close eye out for further losses.
Producers banking on a WASDE rally for new crop fixations were left holding the bag this morning. While the June WASDE was the last obvious hope for a rally to fill the mountain of orders at 75 and 76 cents, we appear to be primed for a summer weather market, and some bullish growers will pin their hopes on a surprise in the June 30 planted acres report.
It is worth noting that the forward contracting basis hasn’t budged from its very narrow range in the past few months, and there’s no talk in merchant circles of the forward contracting basis widening in the short term, so there is still an argument to be made for putting a floor under prices with puts and betting on quality premiums or an improved basis later in the season.
One intriguing strategy put forward in some circles is to fix cotton against a spot basis (rule 5) at current levels with an eye towards taking an LDP (POP) payment if a large crop should depress futures at harvest. We think this strategy bears consideration if the contract offers adequate quality premiums.
The crux of the matter, though, is that the safest course of action will be to be 65-75% priced by the end of June, and hold insurance or puts to put a floor under the remainder of your expected yield.
For next week, the standard weekly technical analysis for the Dec contract remains neutral to supportive, with money flow into Dec heading southward. Scheduled index fund rolling will continue, and also mostly culminate, over the course of next week.
Have a great weekend.