Cotton bulls were winners on the week as the market bounced off an oversold condition near key medium-term support to touch 70.22 – twice. The Dec contract ultimately finished the week up 132 points while Mar picked up 134, leaving the Dec – Mar inversion flirting with flat.
It was an odd week, with Dec blasting out of the gate on Sunday evening on expectations of a hard freeze across West Texas and the announcement of a significant enhancement to India’s minimum support price (MSP), only to be a loser for the remainder of the week, a single point gain on Friday notwithstanding.
The market was again unimpressed with increasing export sales for the week ending Oct 19 – this time to a marketing year high of nearly 310K running bales – even as India’s MSP increase seems likely to bolster US export business for 2017/18, at the least. The market was equally nonchalant regarding the increased probability of a hard freeze across west Texas expected to commence overnight (October 27).
In general, we think the latter was the correct call, in aggregate, by ICE market participants.
On the production side, the market moving news this week was the aforementioned sub-freezing temperatures expected this weekend across the major production areas of West Texas, Oklahoma, and Kansas. As this is being written, it is anyone’s guess as to what the actual damage could be to both yield and quality if temperatures do remain below freezing for a several hours on unharvested cotton. Reports from the region inform us that growers were harvesting as much acreage as possible this week as well as applying additional boll opening agents.
Taking into account harvested acreage to date, the reported percentage of open bolls and estimated yield potential, we conclude that the region has the possibility of losing as much as 250K bales of this season’s expected production. The top 20% of the cotton plant’s bolls, some of which may still be green and unopened, are at the greatest risk of damage.
The upper bolls do not have the yield potential that bolls on the lower nodes provide. Also, many of these plants have begun to dry down, which leaves them much less susceptible to freeze damage due to less moisture in both the plants and bolls. We certainly hope the weatherman has the forecast wrong and that any damage is minimal.
The USDA has now classed 3.4 million bales, or 17% of the USDA’s estimated production. Quality has been well above par with 79% of the crop classed 41-4 and better. Fiber length is similarly excellent with 76% classed 36 and longer.
In the spot market, we continue to see a strong basis for long staple middlings that have no leaf or micronaire issues. In the Midsouth, we are seeing the basis range from -100 for recaps with quality issues to +250 for all premium recaps. It should go without saying that this is still a historically strong basis, and producers would do well to take advantage of it. If experience and common sense are any indicators, it is a matter of when, not if the basis will widen, and should TX escape major damage this weekend, the basis will widen sooner rather than later.
There are still valid reasons to believe we could see a rally in the late winter or early spring, but keep in mind that a Mar futures rally could have limited benefits for producers if it is accompanied by with a wider basis and several months of warehouse charges.
For next week, the standard weekly technical analysis for and money flow into the Dec contract remain bearish, the market having worked off much of its recent weekly oversold condition.
Scheduled index fund rolling will commence on Monday, Oct 30, and will continue (at varying levels) through mid-month. Hence, the Dec 18 contract’s swan song is upon us. As we said last week, this period’s roll could very well pressure Dec futures while increasing market volatility. Given price action post the rally on Monday, Oct 23, it seems the market may already be realizing some pressure from anticipation of fund rolling.
Long spec money could enter the market should ICE cotton’s margin requirement be reduced within the near- to medium term, but the Dec contract seems unlikely to be the beneficiary of any such action.
Have a great weekend!
Source: Agfax