AUGUST 17, 2018
FUTURES LOSE MORE GROUND, DECEMBER TOUCHES LOWEST LEVEL IN THREE MONTHS
- Crop Conditions Worsen in Texas and Oklahoma
- Why Have Export Sales Slowed?
- Several Factors Add Pressure to the Market
- Will Resolution of Trade Disputes Help?
- What Fundamentals Will Traders Be Watching?
Cotton prices continued to slide this week, extending last Friday’s losses. Monday’s open set the week’s high at 85.31 cents per pound, with heavy selling pressuring the market lower through Wednesday when December futures touched 80.65, the lowest price in three months. Daily trading volume increased to its highest level since June, and since last week open interesthas declined 13,285 contracts to 258,025, implying that much of this week’s fall was speculators selling back futures to exit long positions.
CONDITIONS IN TEXAS AND OKLAHOMA
Although Friday’s crop report expected record yields in the Mid-South and Southeast, the situation in Texas and Oklahoma is still negative. Monday’s Crop Progress and Condition report had the remaining Southwest crop developing at or above normal pace, with Texas cotton just below average pace setting bolls and Oklahoma cotton 11 percentage points above average at 71 percent. Across the Cotton Belt, boll opening is four percentage points ahead of pace at 13 percent. Unfortunately, Texas and Oklahoma conditions continued to deteriorate. Texas’ crop share in poor and very poor condition grew three points to 52 percent, while Oklahoma’s share grew 16 points to 46 percent. We hope Monday’s condition report will reflect improvement from this week’s rains.
SEASONAL SLOWDOWN IN EXPORT SALES
On this week’s Export Sales report, 2018-19 net new sales were just 77,700 bales. Higher prices may have hindered foreign demand. Futures prices ranged from 86.76 to 89.17 during the week ended August 9, the reporting period for this report. Although sales were smaller, August and September are seasonally slower sales months, and the current record-high level of outstanding sales means that new sales only need to average 140,000 bales per week to hit USDA’s current forecast (including additional sales for carryover into 2019/20). In other words, weekly new sales do not need to be as high as recent seasons’ to maintain the same tightness in the market.
TROUBLES IN TURKEY
As weaker export sales shows, price seemed to have outrun mills’ buying, but the lack of buyers was just one factor pressing the market lower. Although the precipitation was probably not as helpful as many seemed to think, rainfall in the Southwest did pressure the market. However, international economic turmoil probably did the most harm. Turkey’s economy and finances have been troubled for some time, but rising tension with the U.S. set off a sharp devaluation of the Turkish Lira, sending traders into panic. Many feared that Turkey would be unable to repay U.S. Dollar- and Euro-denominated debts, which stoked fear of “contagion”, i.e. systemic failure among European banks. The fear pushed investors out of all sorts of risky assets, causing stock market and commodity prices to fall.
TRADE TALKS COMING, MAY OFFER SUPPORT
Looking forward, the “noise” of macroeconomic news may continue to have an abnormally high effect on the cotton and other commodity markets for the near future. Thankfully, conciliatory remarks and the scheduled resumption of trade talks between the U.S. and China helped the market to stabilize Thursday. The Dow Jones Industrial average erased the week’s losses. The strength of the U.S. Dollar remains a headwind for commodity prices, making U.S. exports relatively more expensive. On the other hand, a resolution of current trade disputes would take a large amount of pressure off the market.
WATCHING THE FUNDAMENTALS
For cotton fundamentals, traders will continue to focus on weekly crop condition reports, daily quality reports, and weather. Fortunately, the current forecast has decent chances of rain for much of the Cotton Belt. On the demand side of the equation, traders will be keenly focused on Thursday’s Export Sales report for indications whether lower prices have begun to lure back mill buyers.
IN THE WEEK AHEAD:
- Crop Progress will be released Monday at 3:00 p.m. Central Time.
- 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.
