It was a slow, dull week for ICE cotton futures, with the Dec contract giving up a single point on fewer than 49K lots traded over the week’s trading action. Dec did, however, give away 248 points over the span of Sept. Mar picked up 20 points on the week, weakening the Dec – Mar inversion to 67.
Following last week’s break from a bear pennant flag, the market has opted to morph that former flag into a consolidation range of approximately 68.00 – 70.00. Too much supply is thought to be on the stalk, which keeps a lid on prices, and yet demand remains strong. On-call mill commitments of nearly 13.5M bales against all active contract months should continue to lend support to ICE cotton futures, potentially mitigating impending harvest pressure. New export sales are about as high as can be expected, considering the tightness of nearby availability and a later than average US harvest season.
Internationally, news continues to support notions of robust demand for raw cotton. The 2017 reserve auction season has culminated with the central government having rid itself of approximately 14.75M bales – far greater than most originally expected could be off-loaded.
Cotton harvesting and ginning operations are rapidly gaining momentum across the US.
A 2-week stretch of ideal conditions across the Midsouth and Southeast have been a blessing to growers and should prove beneficial to both yield and quality. Recent hot and dry weather has greatly aided in defoliation efforts as leaves are drop bolls pop. Only a few gins are processing seed cotton across both regions, but ginning operations will increase after October 1st as more modules are showing up on gin yards each day. USDA is currently reporting cotton classed from a total of 74 gins across the US with 52 of those gins located in Texas.
West Texas received 2 to 4 inches of unwanted rain accompanied with cooler temperatures. Most observers agree that very little damage has likely occurred to yield or quality but warm and dry weather is much needed over the next few weeks in order to finish out a promising cotton crop. To date, there have been just over 1 million bales classed with 87% of those bales deliverable against ICE futures contracts. Merchants will be monitoring quality closely over the next few weeks in order to assess any lingering damage from this season’s storms.
Given a futures market hovering below producer price targets and harvest getting underway throughout the Cotton belt, it is fair to say that the forward contracting season is effectively over for the 2017 US crop. We continue to advise producers to take advantage of an empty pipeline by selling recaps as soon as possible over harvest. There should be a substantial premium for quality cotton throughout the next several weeks, possibly extending into early December, depending on conditions in Texas.
Over the longer term, there is a growing consensus that once the pipeline is filled, a large crop in the US and abroad could make holding the current range difficult, and prices could dip to the low 60s or below. If China’s reduction in their reserve is an indication of longer term demand, however, there is potential for a friendlier market in the spring, possibly offering another pricing opportunity for producers willing to hold cotton for several months. Whether or not such an opportunity would prove more rewarding than costs associated with storage and interest is another question altogether.
For next week, the standard weekly technical analysis for and money flow into the Dec contract remain bearish. Still, the current consolidation phase could endure until near the Oct WASDE report’s release.
Have a great weekend!