Mar 14 picked up 106 points this week to settle at 80.41. We had opted for unchanged to down for the week, and we were in good shape until Friday, when the tightness of US stocks, and perhaps some pre-WASDE report maneuvering, tipped the scales in favor of the bulls.
The return to a settlement in 400 point limit territory is positive, both technically and psychologically, but the tightness of the weekly ranges is, perhaps more interesting. Mar 14 traded a scant 232 point range – 5 points shy of last weekΆs range – and only a mere 387 points over the past 4 weeks.
A large portion of the lack of volatility is, of course, the paring of speculative positions to effectively net flat; more certainty also is sensed regarding the 2013/14 world and US S&D, the consensus seems to be for some reduction in world aggregate ending stocks.
The tightness of the nearby supply seems evident, given the large drop in ICE certificated stocks this week, the aggressiveness of merchants to procure stocks in the country and the light pace of export shipments given continued robust export sales.
This will provide, we think, some fairly solid support, and may entice the speculative community to either add to or build long positions. Weekly, the technical picture is encouraging, too, as a “rounded bottom” continues to form on the weekly chart; FridayΆs daily action left a “bullishly engulfing” candle on the daily chart, as well.
Demand continues to be robust for US cotton; net sales of US cotton for the week ending Nov28 were off just a bit from last week at just over 253K RBs. The sales number was not only strong, when considering the holiday-shortened sales period per day sales actually exceeded the previous week. On-call sales to be fixed against Mar 14, as well as against all active contracts, were also up gain week over week.
So, it seems that a base of support had been laid prior to the Dec 10 WASDE release. Regarding pre-report estimates, the consensus is for some reduction in world ending stocks and a near unchanged ending stocks within the US, with total world ending stocks excluding China somewhat increased.
We agree with the consensus concerning world and China ending stock estimates, but we expect a reduction in estimated US production to 12.95M statistical bales, coupled with an increase in projected exports to 10.65M statistical bales.
However, the magical number is the US ending stocks projection (ours is just north of 2.6M). We think that the brisk pace of export sales will prompt some increase in the US export projection despite arguments for reduced imports from Pakistan and China and increased export competition from India during the last half of this MY. Most arguments that we have heard or perused regarding this scenario are readily defendable.
We missed the directional call for last week, and we are hoping to do better this week. We will opt for a “wait and see” approach; if a significant increase in OI is shown to have accompanied FridayΆs strong upward push and if US ending stocks decline to 2.8 or less with other WASDE numbers reported at near expected levels we will be directionally bullish. If not, we will be neutral to slightly bearish.
If things shape up bullish early next week, we suspect that continued strong export sales will add further support. Our expectation for the range this week is 78.50 – 82.50 on the inside and 77.20 – 83.75 on the outside.
Louis W Rose IV, PhD has worked with cotton as a producer, consultant, analyst and trader. Rose holds degrees in Education, Agriculture, Plant Science and Business (MBA) from AR St Univ, OK St Univ and the Univ of Memphis, respectively. He has held positions with Aon Reinsurance and Cargill Cotton. Rose currently provides analytic services for various clients and media outlets and is the co-founder of Risk Analytics, LLC, producers of The Rose Report, which he authors. For more info on The Rose Report or analytic services, please visit: www.rosecottonreport.com.