MARCH 9, 2018

DESPITE SOME VOLATILITY, RALLY CONTINUES

Cotton futures were all over the map this week. Prices opened the week with a strong rally through the previous season-to-date high, and May futures settled 314 points higher at 85.23 cents per pound. The lead contract continued the move Tuesday, bursting to a new high of 86.60 cents. Nevertheless, May and July futures gave back all of their gains shortly after making the record. May futures fell back to 81.71 in the same session, which made for the widest daily trading range the market has seen in a long time. December futures were a stark contrast to May, settling higher every day this week. Even as May futures fell 489 points from high to low on Tuesday, December fell only 83 points off its high and still managed to post a gain of 3 points. Volume was higher than average this week, with 67,460 contracts trading Tuesday alone, and the total number of open contracts is up 7,673 to 270,288 from last Thursday’s close.

EXPORT SHIPMENTS SURGE

Thursday morning’s export sales report delivered good news. As the market seems to have suspected all along, shippers are finally overcoming the logistical snags that have delayed export shipments. Those lags caused USDA to lower its February export forecast for the 2017-18 marketing year. That revision has been undone (more on that below), as shippers reported shipments last week far in excess of the average needed to hit USDA’s forecast. In the week ended March 1, cotton shippers reported 551,300 bales, including Pima leaving the U.S. in fulfillment of export sales.  Exporters also reported net new sales of 648,900 bales of Upland and Pima, combined, including both this marketing year and the next. In short, export demand has continued to beat expectations.

WASDE SHOWS LOWER U.S. PRODUCTION, HIGHER EXPORTS

The release of the WASDE report helped the market hold onto gains, with USDA making a few key revisions that tightened the U.S. balance sheet. U.S. production was revised 230,000 bales lower to 21.03 million as ginning and classing data for the Southeast and Mid-South regions implied lower production. As mentioned above, USDA also reversed its February revision to U.S. 2017-18 exports. Departing from the reasoning it cited in February, USDA increased its estimate back to 14.8 million bales. The combination of changes put U.S. ending stocks at 5.5 million bales, which is the smallest estimate USDA has published this season. The tightening of the U.S. balance sheet seems to support the market’s recent move higher.

For the world as a whole, USDA increased the global production estimate by 570,000 bales to 121.94 million. Gains in Australia and Sudan more than made up for decreases in the U.S. and Uzbekistan. The world consumption estimate also increased about 300,000 bales to 120.79 million, with Turkey, Vietnam and Bangladesh increasing 100,000 bales each. The world ending stocks estimate grew 300,000 to 88.85 million bales.

CHINA RESERVE AUCTION TO BEGIN

Monday kicks off China’s state reserve auction for this season. During the auction, which will run from March 12 to August 31, the reserve will offer 30,000 metric tons (roughly 133,000 bales) of cotton per day at a minimum price (averaged from import offers and domestic prices). Over the past two years, the auction has had strong activity that has served market watchers as a key indicator of the health of the Chinese spinning industry. Repeated strong sales volume in the reserve auction could help keep the market up, while poor results could disappoint traders and put some pressure on prices.

KEEP WATCHING EXPORT REPORTS AND WEATHER FORECASTS

The usual data points will continue to hold the market’s attention in the week ahead. Traders will continue to closely watch the weekly export sales report for continued demand at higher prices. There also will be special focus on whether shipments continue to beat the necessary average to hit USDA’s target of 14.8 million bales (i.e. about 360,000 bales per week). Lastly, the drought in West Texas continues with no end in sight. Traders will continue to watch the weather forecasts closely for any reasonable sign of rainfall in this region.

IN THE WEEK AHEAD:

• China’s state reserve begins to auction cotton on Monday March 12.
• The Export Sales Report will be released Thursday at 7:30 a.m. Central Time.
• The CFTC Cotton On-Call Report will be released Thursday at 2:30 p.m. Central Time.
• The CFTC’s Commitments-of-Traders Report will be released Friday at 2:30 p.m. Central Time.