JANUARY 18, 2019

PRICES TOUCH HIGHEST LEVEL IN ALMOST ONE MONTH

• Is Trade War Resolution Near?
• Good Demand Continues, But No Reports to Confirm
• FSA Offices Re-open Temporarily, Loan Redemptions Also Re-open
• Unanswered Questions Lead To Volatility

Cotton prices firmed this week, rallying from a low of 72.21 cents per pound at the open of Wednesday’s session to a high of 74.66 cents early today. Prices settled at 73.89, up 140 points from last Friday’s settlement at 72.49. Although prices touched their highest levels in nearly a month, average daily volume was actually lower this week. However, open interestcontinued to rally along with prices, gaining 4,937 contracts this week to 232,091. Open interest is at its highest reading in two months.

BULLISH FACTORS

A combination of factors seems to be behind the market’s rise. Notably, there were a few leaked details of China-U.S. trade negotiations. On Thursday, it was reported that U.S. officials had discussed (but apparently rejected) reducing the recent tariff increases on Chinese goods as a sign of good will. The markets also reacted well to a report today that China had proposed a roadmap to eliminate its trade imbalance with the United States by 2024 during the negotiations earlier this month. While the markets rallied on this news, traders are still wary. After all, it is awfully hard to base long-term international purchases and sales on rumors of talking points.

FOREIGN DEMAND FOR U.S. COTTON

A second factor helping the market this week was continued foreign demand for U.S. cotton. Mills continue to be active buyers when prices dip, which has helped many traders reduce inventories and exposure. Unfortunately, it is nearly impossible to tell how much U.S. cotton shippers have sold to the export market over the past month because the partial government shutdown is still in effect, and reliable, public trade data is not available.

CLASSING CONTINUES TO MAKE PROGRESS

Thankfully, we still have the classing reports to help indicate how much crop is still coming in. For the week ended January 17, USDA classed 588,801 bales of new Upland and 40,794 of new Pima samples. So far, USDA has classed 14,948,853 Upland bales this season and 563,641 Pima bales for a total of 15,512,494. Cotton arrivals are starting to slow, but there were still 321 out of 523 gins this season sending in samples. Mid-South ginning seems to be wrapping up most rapidly while the Southeast harvest has continued to drag on longer than usual. All Kansas and Oklahoma gins were still active this week, and 131 of 190 Texas gins were still submitting samples.

FSA/CCC

USDA re-opened Farm Service Agency offices temporarily this week, bringing some deeply needed relief to producers. Offices will continue to be open Tuesday, January 22, but will close again after that. FSA’s limited services are centering on necessary clerical duties such as 1099 issuance, eligibility issues, and processing payments. While loan redemptions from the CCC Marketing Assistance Loan were re-opened, producers still are not able to do any loan entry. Only services explicitly cited by FSA as reopened will be available.

EFFECTS OF UNANSWERED QUESTIONS

Market volatility is unlikely to go away over the next few weeks and possibly months. Many traders have felt that the bullish possibilities of a trade deal with China and the return of demand for U.S. cotton should be enough to send prices higher, but there are still many open and unprecedented questions hanging over the market. Positive and specific resolution to the government shutdown, U.S.-China trade negotiations, and Federal Reserve policy could all be big wins for bullish traders, but the bears are mindful of the economic damage the current mix of negative factors is generating. Until traders can once again get a clear picture of cotton’s fundamental situation, macroeconomic outlook and policy developments are likely to be the main price drivers in day-to-day activity.