DECEMBER 29, 2017
DESPITE HOLIDAY INFLUENCES, FUTURES REACH NEW HIGHS
Aggressive buying continued without regard for the shorter trading week or traders’ vacation ambitions. After trading to a low of 77.17 cents per pound Tuesday morning, the market resumed its upward trend. Even though trading volumes were lower, March, May, July and December 2018 futures all traded to new life-of-contract highs. Open interest (i.e. the number of open contracts on traders’ books) climbed 6,666 contracts to 278,997, which is nearing the record set last February.
SPEC BUYING CONTINUES
Speculative traders have continued to buy futures aggressively, but mill demand continued last week as well. The Export Sales report showed net new Upland sales of 163,700 bales for the week ended December 21, 2017. Although that volume is significantly lower than the prior week, it is still a respectable quantity given that March futures traded between 74.93 and 78.07 cents per pound during that period. Additionally, the volume of new sales is still greater than the average pace needed to hit USDA’s current 14.8 million-bale export forecast. Nevertheless, except for heavily discounted cotton, mill demand has slowed as prices have climbed.
GINNING CONTINUES
Gins have been working feverishly to finish ginning the crop, but the size of this crop has outstripped capacity in many locations, especially those areas that do not normally grow much cotton. To date, 15.3 million bales have been receipted in public warehouses, which is over two million bales more than at this time last year. However, the bales receipted are just 74 percent of the USDA crop estimate, which leaves more than 5.6 million bales still to come. Cotton continues to move into market channels as quickly as it comes in, but producers have been unable to sell their uncommitted cotton at the same rate speculators have been buying futures.
SALES OF PHYSICAL COTTON FAIL TO INFLUENCE FUTURES
In the week ahead, producer selling is likely to continue at the same rate, but that selling pressure has not been enough to turn the market. Many market watchers have been asking who else can sell. Since speculative traders are the only other large holders of cotton (through the futures they have bought), all segments of the market are keeping a close watch for any sign that the speculators will begin to liquidate their near-record long position. Export sales cancellations or new bales made ready for delivery against the futures contract (i.e. increasing certificated stock) could scare the market. Technical traders who only watch price action, volume, and open interest, will be carefully watching for trading systems to generate sell signals. On the other hand, mill buyers still have a very large commitment to fix prices against March futures. The market’s future direction seems to depend on whether mill fixation outweighs speculator liquidation or vice versa.
IN THE WEEK AHEAD:
- The Export Sales report will be released Friday at 7:30 a.m. Central Time.
- The CFTC Cotton On-Call report will be released Friday at 2:30 p.m. Central Time.
- The CFTC’s Commitments-of-Traders will be released Friday at 2:30 p.m. Central Time.