This was a very slow news week for cotton. Last week we expected the market to move lower on a need to once again find nearby demand, which we supposed would be aided by funds rolling their long positions from the front to deferred months.
The cotton market moved, and settled lower W/W, but it was helped along more so by a perceived increase in systemic risk in the currencies of emerging markets than any probing for pockets of demand.
Demand for US cotton was again shown to be extremely strong on this weekΆs US cotton export report with nearly 500K RBs of total cotton sold and in excess of 300K RBs shipped. The two week total of new net sales is just shy of 1M bales.
The net sales number put forth this week from the USDA was a surprise to many in the trade, including us. Of course, someone, somewhere knew, but they werenΆt talking.
And, despite concerns about further import quota issuance in China, as well as its new subsidy-based cotton production incentive program, it still continues to be a large taker of US cotton. Of the nearly 1M RBs of new sales over the past two reporting periods, China has been the buyer for over 1/3 of those bales.
This indeed does say something about the profitability of US stocks vs those of the CNCRC reserve. The volume weighted average price of the last sales reporting period, base to May 14, was 86.01.
Hence, cotton purchased base to this futures price level is still profitable for large quantities to be shipped into China. The VWAP corresponding to the sales period to be reported upon next week is near 86.20, and, although we have not yet developed an expected range of expected new net sales for the report, we would expect sales to continue to be brisk.
It will not be long until May 14 will become the de facto front month; Mar 14 OI had already descended to 96K contracts on Thursday of this week. There may be some interesting moments for Mar 14 yet.
It may even test previous highs for the current longer-term uptrend near 88.40, but it is more likely to finish next week near unchanged to a bit lower while trading a range of 84.25 – 87.60 on the inside, or 83.00 – 88.25 on the outside. May 14 may move higher with fund purchases and a perceived tightness in US old crop stocks.
Of real interest to those who actually produce cotton is Dec 14 and how it will fare as planting season approaches. Since the start of this calendar year it has touched the 80.00 level briefly, and only once. It retreated with the front month early this week, and is now trading near the 76.50 mark.
Much of the concern centers on export demand from China during the upcoming 2014/15 MY. Although this is a valid concern, China has not yet shown any propensity to host a fire sale for her domestic mills from its huge reserve stocks, and the new trial subsidy-based cotton incentive program is expected, per official announcements, to be implemented only within the northwest area of Xinjiang. Hence, we, and nearly all others who have put forth estimates, expect cotton production in China to decrease considerably in 2014.
Another reason for the lackluster performance of Dec 14 futures thus far is the range of estimates of increased acreage to be planted with the US this year. Much of the projected increase arises from lower futures prices for corn and soybean.
USDA will provide its first official estimates on the US and world supply and demand balance sheet in late Feb at the annual Agricultural Outlook Forum. In recent years, these initial estimates have proven to be a bit optimistic.
Regardless of the estimates thus far for the 2014 cotton crop, one must bear a single very pertinent point in mind – the cotton actually has to be planted in order for it to be harvested. And the US will need a fair portion of its cotton to be grown in areas in which production is reliable.
A quick, back-of-the-envelope analysis will show that 1,000lb irrigated cotton would currently only produce about $100 more gross income than a 60 bu per acre soybean crop on the same ground. Figure in the increased variable costs and management concerns associated with a cotton crop, and it simply does not work.
I have read and heard many opinions on the fate of Dec 14 futures, some of which relay bearish concerns for the Dec contract – as a trader I discovered some time ago that considering the opinions of others is a profitable endeavor. Nonetheless, unless soybean futures plunge from their current level, we are still friendly Dec 14 into the low- to mid-80s.
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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.
