JULY 6, 2018

FRIDAY BOUNCE REVERSES WEEK’S DECLINE

• Open Interest Declines
• Could TX/OK Abandonment Be High?
• India Raises Minimum Support Prices
• What Did Latest Export Sales Report Show?
• Trade Tensions Weigh on the Market
• Will USDA Lower Production Estimate?

Independence Day shortened the trading week, but the break did not keep futures from extending last week’s decline. December futures marked a high of 85.09 cents per pound for the week at the open of Monday’s session then started a steady decline to a low of 81.75 cents Friday morning before bouncing back to 84.73 cents after the release of the weekly Export Sales report this morning. Trading volume was healthy, and total open interest declined 3,245 contracts to 253,783 during the week.

CONDITIONS DECLINE IN TEXAS AND OKLAHOMA

This week started with a mixed crop progress report. While there was a slight increase in the area rated good or excellent, up one percentage point to 43 percent nationally, the share of the crop rated poor and very poor climbed to 24 percent, up five percentage points. Texas and Oklahoma unfortunately accounted for most of the change. Texas’ poor and very poor share climbed six percentage points to 36 percent, while Oklahoma climbed eight percentage points to 23 percent. The figures reflect broad expectations that abandonment will be very high this year. The slide in condition, despite recent precipitation, definitely will have traders closely monitoring Monday’s Crop Progress update.

INDIA INCREASES PRICE SUPPORTS

On Wednesday, the Indian government announced new minimum support prices (MSPs) for the upcoming harvest. Government companies and agents will purchase crops when spot market prices fall below the published levels. All crops saw their MSP increase as the prime minister made good on a promise to deliver India’s 100,000,000-plus small farmers returns that are 50 percent above their cost of production. Cotton’s support level was raised 28 percent, roughly equivalent to 82.00 cents per pound at today’s exchange rate. India’s ex gin prices are currently 3.00 to 5.00 cents above the new MSP.

NO CANCELLATIONS BY CHINA IN LATEST EXPORT REPORT

This week’s Export Sales report was a pleasant surprise. Most traders had expected further cancellations from China, but the cancelled orders failed to materialize on this report. Large Chinese sales reductions are still a possibility in the coming weeks, and traders may have been hoping for a last minute trade resolution before making a move. Still, the report showed net new sales of 18,000 bales for 2017-18 and 268,200 bales for 2018-19. Large orders for next marketing year (i.e. after August 1) came from Indonesia (67,300 bales), Korea (59,100), Mexico (43,900), Vietnam (40,700), and Turkey (26,500). Although the prospect of Chinese cancellations still hangs over the market, this week’s report again highlighted that demand for U.S. cotton remains strong.

MARKET STILL FOCUSED ON TRADE TENSIONS

If crop expectations, demand, or international support programs had been the key issues, prices would not have declined at all this week. Rather, China-U.S. trade tension seems to have been a terrible weight on the market as the July 6 trigger date for new tariffs approached. Unfortunately, no resolution was announced, and the tariffs on both sides have been enacted. Tensions could escalate which may keep traders on the defensive until the market has a better feel for what trade flows and economic impacts will be. From the look of Friday’s price activity, traders seem to expect minimal additional impact.

WASDE REPORT COMING

Political risks notwithstanding, traders will focus on next Thursday’s WASDE report. Cotton acres increased less than expected on last week’s Acreage report, which signifies the production may not change much. Still, USDA may also reflect the Southwest drought through reduced yield, which will encourage trades to keep an eye on Monday’s Crop Progress report, too. Lastly, attention is unlikely to drift from the weekly Export Sales report on Thursday morning, just ahead of the WASDE.

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.
• USDA releases the July WASDE report at 11:00 a.m. Central Time on Thursday.
• The CFTC Cotton On-Call report will 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.