The bulls won last week — this week it was the bears with the Mar contract giving back 172 points on the week, settling at 72.27. Spreads weakened over the course of the week, but the July – Dec spread remains heavily inverted. The bulk of pressure on the ICE cotton market this week was a result of bearish numbers put forth in the Jan WASDE report.
While US export data for the week ending Jan 5 was a pleasant surprise (approaching 250K running bales), shipments continue to lag the weekly pace required to meet the USDA export target. Even so, in its Jan WASDE report, the USDA enhanced its 2016/17 export projection to 12.5M bales, partially offsetting a nearly 500K bale increase to its US production estimate to just shy of 17M bales. US ending stocks are now projected at 5M bales. Few saw this coming, and we were not among their ranks.
And, although we expected higher production in China and an associated increase to projected world ending stocks Vs Dec, we did not expect the increase to be close to the approximate 1.5M bale figure put forth.
The data are bearish, plain and simple – at least from a fundamental perspective. Some will cite that the market’s current structure continues to favor upward movement, but it seems unlikely (in any meaningful way) to us.
The current rise in the ICE futures contracts has also brought about a rise in the adjusted world price (AWP). At this time, cotton is being redeemed from the loan in an orderly manner as merchants and cooperatives repay for bales to place against sales commitments. Currently, there are nearly 5.1 million bales outstanding in the program, which exceeds the USDAΆs ending stocks projection.
With little to negative carry along the marketΆs forward curve merchants have tried to better recent basis offers in order to offload their inventory, while loan stocks have a shelf life of 10 months. The bottom line is that world consumption must increase to absorb supply (unlikely, given the USDA reduced its aggregate world consumption projection), prices must move lower so that either merchants or mills can afford to carry stocks, or cert stocks must increase to create carry in the market.
WeΆre betting on the latter, especially since evidence of such has recently manifested itself. And, let us not forget that going forward the US will encounter increasing export competition from Australia, Latin America and India.
For next week, the standard weekly technical analysis for and money flow into the Mar contract remain supportive. Data suggest that US net export sales for the week ending Jan 12 are likely to be off Vs figures put forth this week, but that has been the case for some time now, without such actually occurring. Still, at some point, and likely not too far off, sales will slow.
On a more cheerful note, it certainly seems that recent months have favored the underdog, or at least the one less favored – Cleveland (Cavaliers and Indians), Chicago (Cubs), Trump and, most recently, Clemson University. Perhaps this aura plays some role in Dec cotton futures remaining above the 70.00 level, despite burdensome S&D balance sheets. Still, chance favors the prepared mind and this should be the attitude that producers either maintain the status quo with or adopt.
A friend of ours in Alabama has opted to vertically integrate his farming and ginning operation with Red Land Cotton, a new finished textile endeavor. For those of us who are less enterprising, futures and the options pit can work quite well.
Have a great weekend!
