The ICE Mar contract picked up a single point this week on relatively heavy volume and tight trading action, settling at 61.41. The Dec contract fared worse, giving back 48 points on the week and settling at 62.47.
Fundamental news on the week was mostly supportive with world ending stocks moving significantly lower on a slashing of the USDA production estimate and with the movement of the US production projection officially below 13M bales. Too, international grower association estimates published since the WASDE report release suggest that estimates of world production will likely yet move lower. Export sales for the week ending Jan 7 were strong at nearly 200K running bales although shipments were weak. And the market found support in these numbers, but struggled to move higher.
Bearish sentiments were rooted in continued poor economic news out of China and the reports that government officials were meeting with cotton and textile industry leaders to discuss a release offering from reserve stocks.
I think that it goes without saying that China is not likely to burn its massive stockpile for warmth, and this leaves only two avenues for it to move along – increased domestic use or offerings to the export market.
Without a major disaster across a substantial cotton exporting geography, we think that the latter is unlikely. While China is bound to import approximately 4M bales of cotton annually per its WTO agreement, a successful reserve release would likely curb its import of yarn, thus likely trimming world trade of raw cotton somewhat.
In political news, despite strong bipartisan support for the initiative to reclassify cotton as an oilseed, Secretary Vilsack has voiced concerns regarding the legal authority vested within him to do such. I am no attorney, so I cannot offer an intelligent legal opinion on the matter. However, I find it nearly incomprehensible that, given the massive amount of effort, resources and legal skill employed in negotiating, drafting and passing the farm bill, another team of attorneys is needed to actually interpret what was agreed to and passed.
Producers still holding cotton may have noticed that the basis has become widely variable in the past few weeks. We are hearing reports that bids for any given lot of cotton are covering a 200-300 pt range, instead of the more typical 50-100 pts.
Between the lower quality cotton we are seeing at this point in the season, and the fact that most merchants have amassed a comfortable inventory, this will likely continue to be the case for the remainder of the old crop season. If you are seeing a strong basis offered for your recaps, you should take it.
New crop marketing is more of a challenge. If you make the rounds of the farm shows, conventions, and marketing seminars, you’re hearing a lot about tough times for agriculture in general, and youΆre probably getting a mixed message about cotton. Given that the market seems to be letting the basis do the work of recruiting acres, ICE futures may not be the single best tool available to guide your planting intentions.
For the moment, we recommend a conservative marketing strategy. Offer no more than ¼ – 1/3 of your intended crop at a profitable price and wait. A lot can happen in the market between January and May, and long term weather forecasts are for a bumpy ride all season long. YouΆre going to want to have cotton available to take advantage of opportunities that may present themselves later in the season.
For next week the standard weekly technical analysis for the Mar contract is bearish, as is weekly money flow into the Mar contract. Next weekΆs export sales are again likely to be supportive, at least as the market continues to trade in the lower portion of a range where significant sales have been accomplished. Barring a fire sale of cotton from ChinaΆs massive stockpile, downside risk is likely limited over the near-term.
Have a great weekend!
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
