It was another strong week for ICE cotton futures. The May contract gained 87 points on the week as the nearby old crop spread continued to strengthen, despite the commencement of the Goldman roll. Dec was a weekly winner, as well, picking up 58 points and settling at 58.84.
Cotton traded a very subdued range for most of the week – even immediately post the release of very strong (and generally unexpected) US export sales and shipment data. But today (Friday) was a different story as the front month leapt, and settled, above the 60.00 level.
It was again anticipated that China would provide closer information regarding the details of its impending auction of its reserve stocks this week. However, (once again) little specific information was forthcoming. Perhaps China believes that information leaked thus far is sufficient for the market. Still, China has a history of releasing market moving news ahead of major USDA reports, and the USDA will put forth its April WASDE report next week.
At this time, we expect the USDA to trim its US production estimate slightly, commensurate with this seasonΆs final ginning report, while making only minor adjustments to its other US projections. World production and ending stocks are likely to get a bit tighter Vs the March release, but the aggregate world numbers will remain far from bullish. Of course as May approaches, the USDA will prepare to incorporate its 2016/17 balance sheets into the monthly report; hence, backward revisions always seem to be a greater threat at this time of year.
The spot situation remains sluggish at best.
Our friends in the country tell us that major merchants are advising producers and ginners to postpone forward contracting, and while the forward contracts available are at an attractive basis, no merchants seem willing to get more aggressive to gain a competitive advantage. Producer offers appear to be similarly sluggish.
With hard acre numbers still a little in the air and subject to weather concerns and a consensus that there is more room above the market than below, producers seem content to focus on field work and planting and leave the marketing for later. In the absence of aggressive competition between buyers, news from China, or pressure from lenders, we think this is a reasonable approach for now.
With regard to pressure from lenders, we are hearing from an increasing number of producers that some lenders are pressuring producers to forward contract and fix price prior to receiving funding for the 2016 crop. While we are sympathetic to a bankerΆs aversion to risk, we fear that the pressure for short term security might put long term returns at greater risk. Perhaps bankers might acquaint themselves with the option pit and find ways to limit their risk while leaving their customers free to take advantage of better basis and/or contracts later in the season.
For next week, the standard weekly technical analysis for and money flow into the Mar contract remain bearish. Various index fund rolls will continue, as the market continues to await news from China. However, one technical aspect of the market that is quite supportive is todayΆs settlement above 60.00. However, with the May contract entering its swan song, it will likely be July that reaps the greatest benefits from any synergistic reactions to positive fundamental news that may befall the market over the near- to medium-term.
Have a great weekend!
