The Dec contract began the week with a 6 point gap higher and never recovered any portion of the gap en route to a 147 point weekly gain. On the whole, it was a positive week for the cotton market, although there are some ominous points lurking in the latest USDA balance sheets.
As per our expectations, US production was projected lower (by about 100K) bales vs the Sept WASDE report, and this weekΆs strong export sales likely prevented the USDA from lowering its US export projection. Again, a decrease in estimated production should not have been a surprise as the same plots within the same fields were again assayed.
At this point of the season yield enhancement must be realized via lint weight, turnout, less than average loss, etc. If the crop is ultimately found to be larger than is currently projected, it will likely be attributable to statistical sampling error. And, keep in mind that the USDA is quite sophisticated with respect to sampling techniques.
Ultimately, US ending stocks were projected 100K bales lower at 3.1M vs our published estimate of 3.2M. And, we look for this seasonΆs US crop to get smaller, given that the bulk of the damage done recently along the eastern seaboard will likely not become evident until the release of the Nov WASDE report.
While this news is supportive (at the expense of some US producers), the aggregate world projections were less encouraging.
Despite an approximate 1.35M debit to the aggregate world production projection, beginning stocks were enhanced and consumption was debited nearly 1.2M bales vs Sept (approximately 2.2M bales lower vs Aug). World ending stocks were projected 700K bales higher at nearly 107M (which the market seems to be numb to), but it is the continued debits to expected consumption that, in our opinion, are the most troublesome statistic in recent reports.
For next week, the standard technical analysis for and money flow into the Dec contract remain bearish with the market having worked off much of its recent weekly oversold condition. It seems that the market has found a level near 60.00 at which cotton can be sold and fixed. Some commotion was made about such a large share of sales being made to our friends in Mexico and while this is a valid point, we expect others to come to the table below the current market. But we will likely be looking at lower net sales on next weekΆs report.
Additionally, index fund rolling periods begin late this month, which almost always bring downward pressure to our market and such may keep any rallies associated with further US production debits in check.
Our advice to producers at this point is fairly straightforward: Sell higher quality recaps against a strong basis and hold base or lower quality cotton to build larger recaps. Note that we donΆt recommend a long term hold unless your brother-in-law is in the warehouse business, though. Best to let someone else own your cotton before the first of the year and parlay any bullish sentiment into May or July call options.
