JANUARY 19, 2018

FUTURES PRICES REMAIN IN A RANGE

The futures market was closed Monday in observance of the holiday, but prices seemed to continue Friday’s decline on Tuesday. March futures went as low as 80.30 cents per pound before turning higher, and price action reversed course for the rest of the week. Thursday’s settlement price was just 2 points lower week-over-week. Friday’s activity took the market higher once again. Volume was relatively high, and the market saw new, three-consecutive records for open interest. The total number of open futures positions reached 308,726 on Thursday, passing the March 2008 record of 302,683 by 6,043 contracts. Despite the activity, futures prices remained within last Friday’s price range for the entire week.

CLASSING CONTINUES

Cotton classing has continued at a steady pace, with new samples still coming in from more than half of the country’s gins. This week, USDA classed 593,787 bales, which is about 87,000 more samples than were classed in the same week last year. Total upland samples classed is at 16,889,462, 2.32 million ahead of last year. Including Pima, USDA has classed 17.46 million bales of cotton, which leaves more than 2.5 million bales to reach the department’s current production target of 21.26 million. In other words, there is still more cotton coming to the market. Although ginning capacity in many areas has been strained this season, shortage is not the main factor that has driven this market higher.

EXPORTS CONTINUE TO SURPRISE

On the demand side of the equation, export sales continue to surpass expectations. For many weeks, net new sales have been more than the volume needed to hit the USDA’s current U.S. export target.  This week was no exception. Despite making new highs in the futures market, U.S. shippers reported net new sales of 275,100 bales of upland to 19 markets in the week ended Jan. 11. Indonesia, India, Turkey, and Vietnam were the largest buyers, each taking more than 40,000 bales. There were 104,600 upland bales sold for delivery in next marketing year, too. Including Pima, 2017-18 export commitments are at 82 percent of the current export forecast, versus a five-year average of 68 percent at this time of year. In short, mill demand has far exceeded expectations.

SPEC BUYING

Speculative buyers seem to have gained the upper hand over the mills for yet another week. Mills still have a large on-call position in March, May, and July. Some mills have chosen not to wait for lower prices, and others have been forced to fix by shipping deadlines since most merchants require the futures price to be fixed prior to shipment, but the majority of the mills on-call purchase commitments remain. The hard deadline for fixation is Feb. 21, the day before First Notice Day. On First Notice Day, futures sellers can give notice of delivery against their futures sales. There are still just 48,067 certificated bales (bales prepared for delivery through the Exchange), which is not enough to worry about. However, the Exchange also removes daily price limits on First Notice Day, which is more than enough to keep anyone not interested in the physical cotton from keeping a position in the lead contract.

EXPORT SALES CANCELLATIONS?

Further price squeezes likely will cause more sales cancellations. Although new sales were greater, Chinese importers also did cancel 38,300 bales. More cancellations, particularly of on-call sales, may be forthcoming, as China’s domestic cotton prices have become preferable for those mills. The U.S. does not need any additional sales to China to hit the current forecast, but further cancellations could start to affect the market’s psychology. Sellers also are hoping merchants will begin to certificate stock for delivery against futures in hopes that the threat of having to take delivery will get speculators to start selling out of their futures or at least move their purchases forward to May.

BULLISH FACTORS

A few other factors also have helped move the market higher. The U.S. dollar is trading lower versus major competitors’ currencies, which is renewing interest from passive investors in the commodity sector. Commodity indexes are trading higher, and the rise of crude oil to fresh highs last week is helping make the case for buyers. Also, there is a lot of concern about the current La Niña conditions lingering into summer, which usually leaves this part of the country in extreme drought. Some forecasting models have shown conditions weakening, but the recent lack of rain has soil moisture levels dropping. Without a change, abandonment in the Southwest likely will be much higher than in the past two years.

Aside from daily cash market activities, traders will be keeping a close watch on anything they think could signal a change in the market’s momentum. Daily certificated stock levels and, as usual, the weekly export sales report will be focal points.

IN THE WEEK AHEAD:

• 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.