The Dec contract took it on the chin again this week, giving up 475 more points amid spec liquidation to finish up at 85.30. Dec found trade support just below 83.00 this week. The Dec – Mar spread strengthened significantly to 45 points, which is supportive for the contract.
It was a so-so news week for our market, with the most attention seemingly being paid to the imposition of tariffs on US cotton set to commence on July 6.
Overall, market fundamentals have not changed. Demand remains strong and supply is most uncertain.
- Our friends tell us that much of the non-irrigated cotton acreage across West Texas, especially District 1S, is likely to be abandoned.
- The crop across the Mississippi Delta is very strong (especially from Memphis northward), as is most of the crop in the Desert Southwest.
- The Southeastern crop is more of a mixed bag (especially with respect to development and maturity), according to published reports and conversations with our friends there.
ICE cotton future’s run above the 90.00 level (and almost to 95.00) manifested itself in sales cancellations against the 2017 crop, but new crop sales remained strong for the week ending June 14.
Total net sales against 2017/18 were a net negative of nearly 115K running bales; shipments were off, at just short of 320K RBs, but ahead of the pace required to meet the USDA’s 16M bales export projection.
Total sales against 2018/19 were significantly higher versus the previous sales period at around 305K running bales; sales against 2018/19 currently stand at a running total of approximately 5.4M 480lb bales.
We continue to project 2017/18 exports at 16.4M 480-pound bales.
It is interesting to note that most sales against the 2018 crop were to China, despite the aforementioned tariff imposition date. It has not been clear to us whether China will allow import quotas to apply to US cotton.
Recent conversations with our contacts have yielded a consensus that the import quotas will apply to US bales, which is positive for our market and domestic producers. However, it is not known in exactly what manner quota credits will be applied and whether mills in China will have to pay the tariff on the front end and then be reimbursed – which, of course, is not desirable.
Factors That Perhaps Curbed Some Extra Acres
Bloomberg’s annual survey of traders and analysts ahead of the USDA’s June acreage report, scheduled for release on June 29, show an expectation of total US area committed to cotton just shy of 13.75M acres.
Our contribution to the survey was just above 13.43M; if acreage does approach 14M acres, we think that much of the increase will be across West Texas an in danger of abandonment. We think that poor cottonseed prices and lower warehouse rebates have likely curbed some would-be acreage, especially within the Midsouth.
For next week, the standard weekly technical analysis for and money flow into the Dec contract remain supportive but are turning negative. However, it could well be the USDA’s annual acreage report (and anticipation thereof) that most affects market action next week.
If Ever There Was A Time…
And this brings us to producers with new crop to price. If ever there was a time for perspective, this is it. You may recall that there was much talk of whether cotton would ever make it to the mid-80s, and a substantial portion of the crop was priced between 78 and 83 cents.
This week, on the other hand, an 85-cent Dec is $50/bale below the high, and coffee shops are full of producers singing the blues.
We think the next pricing opportunity for new crop cotton will be at the end of next week prior to the June 29 planted acres report. If that report confirms bullish expectations, the first two weeks of July could offer more opportunities to price cotton over 90 cents.
We will certainly be in a full-blown weather market by mid-July and given the support we have seen for the Dec contract, it is easy to make the case that time is on producers’ side in the mid-term.
Have a great weekend!