NOVEMBER 9, 2018 

FUTURES REMAIN RANGE BOUND DESPITE BULLISH REPORTS

• Crop Estimate Shocks Traders but Gains Were Short-Lived
• Production Estimates Lowered in Several Countries, Ending Stocks Fall
• Why are Buyers Reluctant to Pull the Trigger?
• Waiting for a Signal About Return of Demand

Try as they might, futures prices failed to escape recent weeks’ price range. December futures bounced between 77.20 and 80.50, but finished the week at 78.09 cents per pound, within 13 points of the last 20 sessions’ average settlement price. Volumes were heavy as major reports shocked the market, Index funds rolled their large, passive long positions from December to March, and traders readied for the December option expiration today. Through all the turmoil, open interest shed about 8,036 contracts to finish the week at 261,014.

DEPARTMENT CUTS CROP ESTIMATE MORE THAN EXPECTED

The USDA Crop Production Report and World Agricultural Supply and Demand Estimates (WASDE), which were released simultaneously on Thursday at 11:00 a.m. Central Time, were the central focus this week. While analysts’ average forecast was for the U.S. crop to shrink 550,000 bales to 19.21 million, the official November estimate shocked the market. USDA cut 1.35 million bales from the crop, putting the November estimate at 18.41 million. The reductions beat even the most aggressive analysts’ estimates.

LOWER EXPORTS AND ENDING STOCKS

Smaller U.S. production and the slow pace of recent export sales also gave USDA room to lower its U.S. export estimate on the WASDE. U.S. cotton exports were cut 500,000 bales to 15.0 million, and domestic use came down 100,000 to 3.3 million bales. As a result, U.S. ending stocks fell 700,000 bales back to 4.3 million, which is the same as this year’s beginning stocks.

PRODUCTION IN OTHER COUNTRIES ALSO LOWERED

World balance sheet revisions were similar to the U.S. Decreases in India, Pakistan, and Turkmenistan offset an increase in West Africa, reducing total foreign production by 910,000 bales. World consumption also declined 880,000 bales, mostly through decreases among countries that suffered currency devaluations this summer. World ending stocks tightened 1.84 million bales to 72.61 million, with nearly 30 million of that in China.

HOW THE MARKET REACTED

Initially, the market spiked higher upon the WASDE release, but the gains were short-lived. Prices proceeded to fall back to unchanged, and then to dip further into the recent trading range on Friday. Despite the bullishness of this month’s revisions, would-be buyers still are not ready to pull the trigger on additional purchases. Downstream yarn markets remain soft as textile and apparel manufacturers, especially in China, remain deeply cautious about which direction the trade dispute will go. Speculative players also are not keen to stake too large of a position with the current level of policy uncertainty.

WATCHING TRADE AND WEATHER

In the week ahead, traders will be closely eyeing whether progress will continue in the China-U.S. trade discussion ahead of the Nov. 26 to Dec. 1 G20 meetings. Weather is still a major concern, too. The Southeast is likely to get plenty of unwanted rain over the next week which could further degrade unharvested cotton. There is snow in the forecast for the Texas Panhandle, Oklahoma, and Kansas, but Southwestern producers seem generally welcoming of the freeze that is coming with it. Lastly, traders will be closely watching the next U.S. Export Sales report which will be released one day later (Friday at 7:30 a.m. Central Time) because of the Federal Holiday. That weekly report may be the first public indication when demand does return, and mill demand seems to have been the missing ingredient for a sustained rally in recent weeks.

IN THE WEEK AHEAD:

• The CFTC Cotton On-Call report to be released Thursday 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.