MARCH 16, 2018

MARKET COOLS, DRIFTS LOWER

Intra-day trading at the Intercontinental Exchange (ICE) has been volatile this week, but average daily volume fell and the market seemed to lack a clear direction. The highest price of the week was at the open of Monday’s session when May futures briefly rallied to 85.03 cents per pound before falling. It took another session of significant decline before futures could find their footing, and the May contract touched the week’s low of 82.04 before bouncing back.

The majority of this week’s relatively modest volume occurred between 83.00 and 84.00 cents. Farther out, December futures held their ground on Monday, matching last Friday’s record-high settlement at 78.49 cents. Nevertheless, even December futures showed signs of weakness on Tuesday and Wednesday, breaking a long streak of consecutive new highs.

ANOTHER EXCELLENT EXPORT REPORT

The market has become rather accustomed to strong export sales reports, and this week’s report was excellent. For the week ended March 8, U.S. cotton merchants reported net new sales of 321,400 bales of upland cotton for this marketing year and 199,200 for next. The number of bales actually leaving U.S. borders (i.e. reported shipments) was 439,900 bales including Pima, which does a lot to quell fears that the U.S. does not have the logistical capacity to hit USDA’s March export forecast of 14.8 million statistical bales (i.e. refiguring the bale count according to 480 pounds per bale). Current U.S. export commitments have now exceeded that forecast. While there are usually sales that are carried over into the next season, it is unusual for the U.S. to exceed USDA’s target this early in the season. If shipments do keep up, it is very likely USDA will have to lift its export forecast again.

CHINA RESERVE SALES BEGIN

This week also saw the beginning of China’s reserve cotton auction. This year’s auction has not posted the sort of spectacular daily performances that stirred up global markets in the past two seasons. The average price and the percent of daily offerings actually purchased have fallen each day. However, it is too soon to tell whether the demand picture inside China is to blame or whether the slow start reflects China’s better-than-expected crop, which left more cotton in the open market than at this time last year. The auction still has a long time to run, and traders certainly will be keeping an eye on it.

SOUTHWEST NEEDS RAIN

Looking forward, speculation about 2018 crop prospects already are starting to weigh on cotton traders. While recent abundant rainfall has aided the Mid-South and major swaths of the Southeast cotton growing areas, the Southwest remains dry. Some would say bone dry. This week’s drought monitor showed a slight intensification and increased drought for Texas. Eastern Oklahoma benefited from recent rains, but drought conditions intensified in the western half of the state. Conditions intensified in Kansas as well. There is still some time for things to change, but this week’s forecast shows little hope for precipitation. We hope the pattern breaks sooner rather than later, but the dryness has a lot to do with why December futures have been able to move above 78.00 cents.

KEY FOCAL POINTS

Export shipments, Southwest weather, and China’s reserve auction are the key focal points in the week ahead. Beyond proving the U.S. indeed will make USDA’s export forecast, traders will be looking for the pace of export shipments to see how much farther USDA will have to move their estimate in the months to come. Sales have been much better than needed, but analysts will be looking for any faltering there, too. Additionally, any positive development in Southwest precipitation forecasts could give December futures some pause as well. A forecast is not the same thing as actual rainfall, but the market is forward-looking, so a significant change in the outlook will have an effect. Lastly, this week’s Chinese auction results were a disappointment to many. The market will be watching closely to see whether the falling sales are a bellwether or just opening jitters.

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.
• 2018 Crop Progress Reports will begin April 2.