DECEMBER 13, 2019

FUTURES RALLY TO FIVE-MONTH HIGH

• WASDE Shows Tighter U.S. Balance Sheet
• Weekly Export Sales Improve
• U.S./China Trade Talks More Positive
• Spot Market Prices Up

It was a great week for the futures market with the March contract receiving multiple pieces of bullish news that helped propel a rally to a fresh five-month high. The low of the week was printed at last Friday’s open (64.51 cents per pound) after which the price rallied to 66.32 cents. Most of the activity Monday, Tuesday and Wednesday stayed within Friday’s range despite a tighter U.S. balance sheet on Tuesday’s WASDE report. A great export sales report and the first indications that a “Phase 1” trade deal with China had been reached sent the market to the week’s high at 67.38 cents on Thursday. The price settled at 67.17 on Thursday, up 266 points for the week. Volume was high Thursday but fairly routine the rest of the week. Through Wednesday’s close, the number of open contracts in the market had fallen 1,948 to 195,064.

WASDE HIGHLIGHTS

Tuesday’s crop production report reflected what Southwest growers already knew, i.e. that the crop is much smaller than what we all thought it would be a few months ago. Texas went down 500,000 bales to 6.6 million, followed by Georgia, down 100,000 bales to 2.6 million, and Oklahoma, down 80,000 bales to 650,000. Only North Carolina and Missouri were raised significantly. Overall, USDA cut its U.S. production forecast by 611,000 bales to 20.206 million statistical bales (480 lbs./bale).

There were numerous revisions on the world balance sheet this month. Major importers such as Turkey and Pakistan had their crops collectively lowered 900,000 bales. Major exporter crops were mixed as a gain of 900,000 bales in Brazil and 500,000 bales in Uzbekistan offset declines of 500,000 bales in India and 350,000 bales in Australia. India’s beginning stocks were also cut as USDA revised its estimate of last year’s production by 700,000 bales. World supply was decreased 1.695 million bales (864,000 bales of beginning stocks and 831,000 bales of production), but consumption also was reduced by 1.225 million bales thanks in large part to a cut of 1 million bales in China. World ending stocks are projected at 80.32 million bales versus a total use at 120.27 million.

EXPORT SALES

With foreign crops shrinking, especially among major importers and foreign export competitors,  USDA held its U.S. Export forecast at 16.5 million bales which tightened U.S. ending stocks by 600,000 bales to 5.5 million. Thursday’s export sales report seems to have corroborated the WASDE, at least for now. Last week’s report disappointed some traders, but net new export sales for the week ended December 5 were healthy again and shipments were actually stronger than in the past two years. Accumulated exports are still well ahead of the past two seasons, too. There is nothing in the data to indicate a slowdown just yet, but it is important to remember that the U.S. is just entering its heavy shipping season. Traders will be keeping a close eye on shipments all season for any indication that the USDA forecast is off.

U.S./CHINA TRADE NEGOTIATIONS

Administration officials have been making positive comments on trade negotiations with China for the past few weeks, but Thursday’s headlines and tweets seem to have finally convinced the market that a deal was coming. Stocks and commodities began large rallies immediately following a tweet from President Trump that said “Getting VERY close to a BIG DEAL with China. They want it, and so do we!” Stock indices rose to record highs and the commodity sector put in an impressive rally.

Next week’s export sales is the main data point that traders will be watching, per usual, but the most important thing that traders will be chasing is the details of the prospective deal with China. Any deal has far reaching implications as nearly every active market has been affected by the dispute. The ordinary market signals pale in comparison but probably will come back into significance if the trade relationship returns to a more stable footing.

SPOT MARKET ACTIVITY

Through late Thursday afternoon The Seam’s G2B  platform traded more than 122,000 bales during the past five trading days. The average price received by producers was 59.65 cents per pound, up 235 points from the previous week’s average. The average premium over the CCC loan was 6.97 cents per pound, 117 points more than the previous week. Cotton offered for sale by growers stood at 251,000 bales.

COTTON CLASSINGS

 The Corpus Christi Classing Office has surpassed 2 million bales classed with the majority of qualities remaining very good. The Abilene Classing Office has classed more than 700,00 bales with the predominant qualities being good. The Lamesa Classing Office has classed approximately 800,000 bales for the season, and in Lubbock the Classing Office has classed roughly 1.8 million bales. For the U.S. on the season, about 80 percent is tenderable for delivery on the ICE No. 2 contracts as reported by USDA with more than 14 million bales classed.

IN THE WEEK AHEAD:

• Thursday at 7:30 a.m. Central – Export Sales Report
• Thursday at 2:30 p.m. Central – Cotton-On-Call
• Friday at 2:30 p.m. Central – Commitments of Traders