It was “buy the rumor, sell the fact” this week as generally supportive USDA balance sheets and weak US export sales resulted in a 100 point loss for the Mar contract. Mar settled at 63.71, despite the continued selloff in the US Dollar Index this week as speculators apparently booked some profits. The major grains finished the week mostly lower.
The USDAΆs revised cotton balance sheets for the 2015/16 crop, both domestically and at the aggregate world level, tightened significantly on the Dec WASDE report. The high notes were US production and ending stocks projections of 13M and 3M bales, respectively, which is supportive for prices. Aggregate world ending stocks were drawn down significantly, but one can hardly, on the surface, term nearly 104M bales of ending stocks bullish, or even moderately supportive. Still, projected world ending stocks outside of China continue to shrink, and now are projected at just 39.37M bales. This is supportive and, for the time being, we think it carries more weight than does any estimate or projection of world ending stocks.
However, all of this supportive fundamental data was tainted on Thursday with a dismal US export sales report that logged only approximately 85K and 111K bales of total net sales and shipments, respectively. The data strongly suggest that the approximate 1.25M bales of US export sales accomplished near 61.50 and higher fell away above the 63.00 level. However, the poor showing for the week ending Dec 3 may not have been entirely due to price. After all – the US logged around 1.25M statistical bales of export sales during the previous 5 sales periods. Perhaps our customers did a bit more than the recent hand-to-mouth purchasing over the last 6 weeks.
Still, we will likely return to the supply side of the equation to drive potential demand rationing. U.S. and aggregate world production projections could very well continue to move southward. We continue to expect final US production for this season to be officially logged at less than 13M bales. And, such would likely help cotton build value. The poor quality of this seasonΆs US crop, relative to recent average quality, will likely also help in cottonΆs accrual of value.
Our friends in the broker/merchant segment tell us they are seeing a higher than usual percentage of the crop sold and selling. It is likely that high quality cotton will be hard to find after the first of the year, which creates a difficult decision for producers still holding higher quality cotton: Should they take advantage of the historically strong basis being offered now, or should they roll the dice on the likelihood that scarcity will inspire even greater demand for high grade cotton in the new year?
Obviously, producers have to have a little bit of gamblerΆs blood, or they wouldnΆt be farming for a living, but weΆre inclined to think the bird in the hand is the stronger argument this year. Call options are a much safer way to be bullish.
For next week, the standard weekly technical analysis for and weekly money flow into the Mar contract are bullish, with the market having worked off its recent somewhat overbought condition. Next weekΆs export sales are again likely to be somewhat disappointing, relative to recent sales totals, while the market could experience increased volatility around a likely US interest rate hike from The Fed on Wednesday.
Have a great weekend!
Louis W Rose IV, PhD has worked with cotton as a producer, consultant, analyst and trader. Rose holds degrees in Education, Agriculture, Plant Science and Business (MBA) from AR St Univ, OK St Univ and the Univ of Memphis, respectively. He has held positions with Aon Reinsurance and Cargill Cotton. Rose currently provides analytic services for various clients and media outlets and is the co-founder of Risk Analytics, LLC, producers of The Rose Report, which he authors. For more info on The Rose Report or analytic services, please visit: www.rosecottonreport.com
