Dec cotton posted a very poor performance this week, its attempt to redeem itself overnight notwithstanding. Dec gave up 250 points on the week, all but one point of its 357 point trading range was south of last weekΆs 64.39 settlement. Dec corn futures lost a bit more ground while Nov soybeans continued their collapse. Wheat settled up very near unchanged on the week.
Bearish news abounded this week. From China, announcements came that imports would be limited to the roughly 4M bales that China is required to import per its WTO agreement. Further, and perhaps most unexpectedly, it was announced that the subsidy program afforded to producers in Xinjiang would also be made available to producers in eastern provinces. Some of this news was mitigated as estimates of a 2M MT (about 9M bales) shortfall between ChinaΆs production and consumption for the current MY, which is greater than the USDAΆs latest projection. And, too, rumors also abounded that sales from the CNCRC reserve would be suspended in order to prompt consumption of the domestic new crop. This seems counterintuitive, to us, given the policy statements concerning imports.
In India, the Cotton Association of India projected this seasonΆs Indian production at 31.5M bales, 1M bales higher than the USDAΆs latest projection. And, US currency just keeps getting stronger.
Concerning supply, data revisions to crop insurance acreage data lead us to believe that final US cotton acreage will fall within a range of 10.75M – 10.9M bales. And, we have adjusted our production estimate to near 16M bales. Very soon classing data will enable us to be more certain of this yearΆs production. We do expect overall yield to be debited a bit more on the Oct WASDE report, given less than optimal conditions that endured for a period of 1 – 2 weeks recently. Internationally, we still expect world production to be greater than the USDAΆs 118M bale projection.
On the demand side, US export sales improved this week at approximately 155K RBs. Internationally, spot prices continued their decline this week amid reports of high yarn inventories and decreased demand. This, coupled with likely continued strength in the US dollar, will likely keep US export sales under pressure.
Looking forward, things do not look positive for Dec futures. Similarities between this year and 2008, a year in which Dec futures traded down into the upper 30Άs, are striking. And, although this year lacks the economic meltdown of 2008, things are not upbeat across much of the world. Relative US economic strength has propelled the US Dollar Index to the same levels as during the cotton market crash of 2008. And, as in 2008, it is occurring at the worst possible time of the season – autumn, when harvest pressure increases.
To be certain, we are not predicting a similar crash will occur as it did in 2008. There are far too many factors to review in this brief space.
Could Dec futures fall into the 40Άs or lower?Of course, it has occurred on multiple occasions prior to this season, but it is a bit too early to predict such an occurrence.
The gist is this – Dec can move higher, we saw it do so last evening, most likely in conjunction with short-covering in China amid increased margin requirements. However, upward movement, over the near-term, at least, is likely to look much as it did last evening – not trending, but spiking amid increased volatility. Breaks could be severe.
Downside risk, per our thoughts and calculations, is much greater than upside risk on a weekly and longer-term basis. The Specs see it; for the week ending Sept 23 they halved their net long futures position, although they are likely continuing to buy the Dec – Mar spread. It appears that they remain net sellers of volatility, and, to us, this suggests that the 60.00 level may provide greater support than previous levels. But, then again, we thought this about the 70.00 level some months back.
Our bias is for near unchanged to lower for next week, and we expect Dec to take a crack, at least, at 60.00.
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
