Dec. gave up 223 points this week, trading below a two year low before finally closing at 74.85 for the week. Dec has been a loser 7 of the last 8 weeks, giving up 909 points over the span. This weekΆs results were on par with expectations put forth here last week, although given the problems current price levels pose for the US producer, we revel little in being correct in our analysis. Give us time, though, we will surely miss again.
A point we missed last week was that old crop export sales bore a better than average chance to be strong. They were anything but; old crop sales were just above flat and new crop sales did not fare much better at just above 24K RBs. Shipments remain on pace to exceed the USDAΆs 10.5M bale export projection for the current MY, with a final number within the range of 10.7M – 10.9M still very much in play. I hope so, or I may owe the USDA an apology.
Not much else can be said for the week. Both fundamental and technical analyses pointed lower, and it occurred.
Looking forward to next weekΆs holiday-shortened trading action, the calendar is filled with pertinent economic report releases from both the US and the EU. The premier event, however, will be the USDAΆs acreage report release on Monday.
It seems to us that delayed planting in the mid-southern and southeastern states, coupled with simultaneous declining Dec cotton futures and increasing Nov soybean futures, and the timing of the second substantial rains across West Texas, all likely lead to a reduction of planted acreage.
Again, next weekΆs old crop export sales could improve; the sales period encompasses the period when merchants may have made final “fire sales” before having to carry old crop stocks through the inversion between new and old crop futures.
On the positive side for US cotton prices, a strong monsoon has yet to materialize over major cotton producing areas of India and Pakistan; Indian spot rates have reflected this concern this week. China, too, has experienced dryness in the North China Plain and in the Yangtze River Valley, and the crop in Xinjiang is noticeably behind schedule this season. Australia, the largest export competitor with the US, with respect to reliable deliverability of quality stocks, is expected to produce markedly less cotton Y/Y, as well.
Further, despite a precipitous drop in OI, the speculative community did not change their overall position W/W, as of June 24. To us, an analysis of the smart money tells us that the current decline is apt to slow over the near-term, without other unexpected bearish news being made known to the market.
Still, the current market bearishness is largely supply-centered, specifically with respect to US new crop prospects. Private US S&D estimates range from around 15.5M to just above 17M bales for the US. With unchanged acreage on MondayΆs report vs the Mar 31 projection we would expect the USDA to put forth a projection within a range of 15.5M – 16.0Mbales on the July WASDE report.
For next week our directional bias is conditional, depending on the USDAΆs acreage estimate; unchanged to higher expected acreage will likely send Dec lower while an estimate near our expectations could prompt Dec to challenge the overhead gap at 77.95 – 78.00.
Technically, Dec remains oversold and our proprietary analyses indicate that similar historic market structures have a 2 in 3 chance of settling higher W/W, but also often very near unchanged. We expect Dec to trade a range of 73.00 – 76.40 on the inside or 72.00 – 78.00 on the outside.
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