Mar 14 was a 97-point loser this week as it traded within a tight 280 point range (76.55 – 79.45) that saw both the upper and lower gaps from last week filled. Mar 14 threatened to post a gain for the week, but data showing that ChinaΆs imports from the US were lower for both month-over month and year-over-year metrics, drove the market down 170 points to fresh lows for the current downtrend.
While Mar 14′s trading action for this week was pretty close to our call, we missed on our prognostication that speculators would take more of an interest than what this weekΆs commitments of trader reports evinced; speculative funds and holders on non-reportable positions were actually a small net short when considering both futures and options for the week ending Nov 5.
We continue to suspect that the speculative sector continues to be uncomfortable with the uncertainty regarding a decision from the CNCRC in China as to how to best draw down the reserve stockpiles and regarding how to most efficiently subsidize cotton producers. An announcement concerning the initial release auction of stocks was expected this week by many, but it never came.
What did arrive, however, was an announcement from the CNCRC that they had revised their estimate of China aggregate production this season to only 30.7M statistical bales versus the latest USDA projection of 32.5M – weΆre betting that the USDA will come lower as well, (perhaps much lower) on the Dec WASDE release. The CNCRC stated that the reduction was yield-driven as a result of poor weather conditions in early Sept.
On-call sales for the week ending Nov 7 were nearly static from the previous report, with Dec 13, of course, accounting for most of the reductions. Mar 14 was nearly unchanged, making on-call sales something of a neutral indicator for next week.
Export sales for the week ending Nov 14 were strong once again with an excess of 300K RBs of net sales logged for both upland and ELS cotton types. Shipments were still light at just under 100K RBs. Total commitments are approximately 59% of the USDA 10.4M statistical bale projection and the US needs to ship approximately 232K RBs per week, on average, to meet the USDA projection for the current MY.
Shipments should quicken in pace as the US harvest progresses. Rumored aggressiveness of merchants as they try to procure stocks in the country lend some confidence to our hypothesis that the recent light pace of shipments has been somewhat supply-driven.
We also look for the USDA to increase its US export projection on the next WASDE release, perhaps substantially. If this occurs, and especially if the US production projection either remains static, or decreases slightly as our preliminary analysis suggests, things will begin to feel a bit snug with respect to US ending stocks projections for July 31 of next year, which would presumably be supportive of Dec 14 as planting season nears.
Looking forward to the short week of trading next week, we think that Mar 14 has, per data within recent US export reports, found a level at which physical business can be done profitably for mills.
And, we expect another strong export report next week given the futures price, the A-Index and its spread with the futures and the level of US currency over the sales period to be reported upon. And, sans a possible reserve auction release announcement from CNCRC, that is about all that is foreseeable for the short week.
Our preliminary analysis calls for another weekly loss, although most likely a modest one. And, even if our analysis did not suggest such, there is the matter of the hard evidence – the cotton market has managed to either not respond to supportive and bullish news or retrace from sharp price spikes as stop orders are filled. We suspect that this will be the case until the speculative sector shows some confidence in re-entering on the long side.
However, those who have been short this market may see an opportunity to cover short positions (weΆre guessing on Wed), if they agree with our analysis that another strong US export report is waiting in the wings, and reel in some profits. And, if the report is again strong, Mar 14 could close out next week a small winner on Black Friday.
For us, it all reduces down to no real bias in the short-term as we look for Mar 14 to trade a range of 75.50 – 78.50 on the inside or 74.50 – 79.50 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.
