NOVEMBER 16, 2018 

LACK OF DEMAND SENDS MARKET LOWER

• December Cotton Falls to Lowest Level Since February
• Export Sales Volume Continues to Disappoint
• Harvest Weather Affects Quality
• Trade Fears Outweigh Potential Bullish Factors

December futures prices returned to the bottom of the past few months’ price range this week. On Tuesday, December futures made their lowest settlement since last February at 75.86 cents per pound. Open interest in the lead contract has declined sharply, helped lower by the expiration of December options last Friday and mill fixation of remaining December on-call commitments. Total open interest fell 19,996 contracts week-over-week to 241,018, which is the lowest level since last November.

WATCHING RETAIL DEMAND FOR APPAREL

Market weakness is largely attributable to the continued absence of fresh demand. This week’s Export Sales report demonstrated how slow sales are with just 67,600 bales of net new sales for this marketing year. In part, mills are still working through the record number of orders that we started with this marketing year. On the other hand, downstream retailers are reluctant to place new orders for next season until there is more clarity on tariffs. On the bright side, October’s retail sales data was better than expected. October clothing sales were up 4.7 percent over last year, which is a good omen that retail orders for clothing and apparel will pull demand through eventually.

HARVEST LAGS, KEEP AN EYE ON QUALITY

Crop weather was poor for much of the cotton belt this week. Harvest is significantly behind normal, and the quantity of rain that has fallen on open cotton has deteriorated grades across the country. Last year, only 21 percent of the U.S. crop classed as 41 color (Strict Low Middling), compared to 40 percent of the 6.72 million bales classed so far this year. Exporters had been hoping for a greater share of 31 (Middling) cotton and may have trouble selling the lower grades that do not fit what they need for their unfulfilled sales. Although much of the outstanding sales requires Middling cotton, Strict Low Middling is the base grade for the futures contract and traders have been preparing their excess for delivery against the futures contract. Certificated stocks have nearly doubled over the past week to 111,532 bales.

GOOD NEWS IN SIGHT, BUT TRADE ISSUES CONTINUE

Bullish traders continue to see arguments for the market to rally. The world is still set to produce less cotton than it will consume, pipelines are starting to empty, and foreign currency movements have begun to come back in favor of U.S. exports. However, the U.S.-China trade conflict is still hanging over the market like a wet blanket. Analysts have no idea what to forecast for world consumption if there is no deal, while the full economic impact of a China slowdown on the global economy is unclear. Needless to say, large portions of traders are sitting on the sidelines ahead of the Xi-Trump meeting at the end of the month.

DECEMBER FIRST NOTICE DAY APPROACHES

Next week is a short trading week. The exchange will be closed Thursday for Thanksgiving. The December notice period (when those who wish to deliver against the futures contracts must notify the exchange) starts Nov. 26, and mills will have to fix what little is left of their December commitments by the end of trading on Friday. Traders also will be watching the growth of the certificated stock and the Export Sales report, which will be released Friday.

IN THE WEEK AHEAD:

• Crop Progress and Condition will be released Monday at 3:00 p.m. Central Time.
• The CFTC Cotton On-Call report to be released Friday at 2:30 p.m. Central Time.
• The Export Sales report will be released Friday at 7:30 a.m. Central Time.
• The CFTC’s Commitments-of-Traders will be released Friday at 2:30 p.m. Central Time.