Cotton bears were winners on the week as the market continues to grind lower. The Dec contract gave up 174 points while Mar gave away 139, trimming the Dec – Mar inversion to 11 points.
The market was unimpressed with increased export sales for the week ending Oct 12. Total net sales of around 275K running bales were reported, although shipments were weak at around 95K. Weekly sales continue to eclipse the pace required to match the USDA’s 14.5M bales export projection. Hence, it seems to be the shipment number that troubled cotton investors; we do not see any reason to be alarmed just yet, especially knowing how dry the supply pipeline has been. There is every reason to believe shipments will pick up substantially in the next few weeks as cotton is delivered into merchant hands and warehouse shipping orders are filed.
Harvest operations have made excellent progress this week under mostly clear skies across the cotton belt. After a slow start (a week or two later than normal) picking and ginning efforts were kicked into high gear this week across West Texas and Oklahoma. Cotton pickers are now rolling through fields and modules are beginning to accumulate on gin yards. The Midsouth and Southeast harvests continue to ease right along with very few interruptions to date.
Thus far, yields in both regions have been much better than average, and we are hearing of more growers being pleased with yields than disappointed. The bottleneck in the marketing supply chain is rapidly easing with the USDA’s daily classing of more than 120K bales becoming the norm. In excess of 722k running bales were classed over the week ending Oct 19, bringing the total to 2.49 million for the season.
Both merchants and cooperatives are anxious to receive bale receipts in order to look over their hand and get cotton applied for shipment. With the size of this year’s crop, the large amount of cotton sold to date and the current lack of carry in the futures market there is expected to be a rush to get cotton shipped in a timely and orderly manner this season. And, the US cotton industry is poised to meet these needs. Fiber quality and shipping reliability has and will continue to be the primary reason US cotton brings a premium in the world market.
The empty pipeline is still inspiring very aggressive basis in the spot market, and we are seeing a 200 to 350 point premium over Dec futures being offered for long staple middlings with no quality issues. Recaps with micronaire or leaf issues are seeing a basis that, while still historically attractive, is 100-300 points below premium middlings and above.
From our perspective, it is difficult to make an argument for holding cotton in this environment. The short to mid-term futures prospects look to be neutral to bearish, and the basis will almost certainly widen in the next few weeks. At the very least, merchants will become far more selective on quality, and the discounts for leaf, micronaire, and/or color will widen. The smart play for unsold cotton would be to sell into a strong basis with an eye towards buying May, July, or even Dec 18 calls if one harbors long term bullish hopes.
For next week, the standard weekly technical analysis for and money flow into the Dec contract remain bearish. However, the market is now moving into something of a weekly oversold condition. Overall, our market likely needs to probe lower to find greater demand; significant rallies are likely to be met with hedge pressure. Long spec money could enter the market should the ICE cotton margin requirement be reduced within the near- to medium term. ICE cotton currently has the greater margin requirement than any of the major CME grains.
Scheduled index fund rolling begins one week from Monday, Oct 23, with this period’s roll expected to pressure cotton futures. It will almost certainly increase volatility.
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Have a great weekend!
Source: Agfax