Bears are now winners on 3 consecutive weeks, with Dec giving back 334 points over the period. The Dec contract gave up 97 points on the week while Mar lost 99, the inversion remaining essentially unchanged at 22.
US cotton producers had insult added to injury when a bearish certified acreage report was released two days after the bearish WASDE. In short, US cotton producers planted significantly greater acreage than either the Mar 31 planting intentions report or the June 30 acreage report suggested. As of Aug 1, US producers had reported sowing nearly 12.3M acres of cotton while abandoning nearly 8.5% of this figure. Significant acreage was also logged into the prevented plant category.
Considering how USDA-NASS has handled these figures, total acreage will likely ultimately be estimated near 12.3M – 12.45M acres. Texas has already reported insured acreage of around 5.8M bales Vs the 5.7M bale figure that USDA has employed in its July and Aug calculations, and most of the upward adjustment will likely be applied to yield estimates within the Sept WASDE report. Hence, it seems that US production has the potential to reach 21M+ bales.
Still, we think that the US is unlikely to carry forward 5.8M bales out of the current marketing year. Demand for US cotton for export remains strong, but recent sales numbers have been much less gaudy Vs figures put forth in the spring and early summer of this year. This is understandable. No matter, though, the market’s focus has shifted from strong demand to stellar supplies and specs seem to want to see confirmation of much more US cotton sold and leaving shore as quickly as possible before committing to a significant aggregate net long futures position.
US crop condition has continued to show improvement over the past few weeks with the USDA most recently rating it 61% good to excellent as of August 13. Crop condition improvements across the belt are attributed to ample moisture from Arizona eastward. Some regions have had more than enough rain, specifically the northern panhandle of Texas and the southern Delta.
It is hard to believe that in the middle of August we have growers from both Mississippi and Texas telling us “we need no more rain this year”. Many fields across the US are at or nearing the last effective bloom date- meaning we are rounding the last turn and heading for the home stretch as both irrigation and insecticide applications are being either curtailed or terminated for the season. Reports from South Texas continue outstanding with record dryland yields and excellent quality. With 333K bales classed to date, 79% is middling and better with 92% of the classed bales tenderable against ICE futures.
Internationally, hail damage had been reported across Xinjiang, China while too much rain across portions of India (and too little in others) and pest infestations continue to be noted on newswire stories. For all this, the overall condition of crops within these regions – and around the cotton-producing world – seems to be very good, which of course is not bullish.
Clearly, producers need to be ready to contract, fix, or hedge cotton on rallies that approach or break the 70-cent mark base Dec. With that said, we are taking some comfort in noting that last weekΆs reports have not pushed the Dec Contract out of sight of the 70-cent line, and there is a consensus among analysts that we should see a sideways market for the short term.
Given this, producers who have reached the 50-75% sold mark can likely afford to breathe easier, and be ready to market recaps on their earliest cotton for a stronger basis. Producers who have sold less should give serious consideration to either contracting cotton with Dec over 6800 or laying in put options base Dec or Mar.
For next week, the standard weekly technical analysis for and money flow into the Dec contract remain bearish, but the market is again technically oversold, especially on a daily basis. However, at this time it looks as if any recovery toward 69.00 – and particularly 70.00 – will be viewed by many participants as a place to sell our market.
Have a great weekend!
