“Buy the rumor, sell the fact” played out true this week as traders saw a US S&D balance sheet on Wednesday’s WASDE report that deviated very little from average published expectations. Liquidation by index funds this week and a US export report that showed the first real signs of demand rationing so far this MY forced the front month lower, rather than near unchanged to a bit higher, as we had expected at this time last week.
The lead OI month is now July and, when adjusting the weekly data for the effective lead month change date (April 9), the front month gave up 195 points on the week.
According to the USDA, projected ending stocks for the current MY are lower than at any time since the 1990/91 MY. Well, that ispartially true. It will be true if it, in fact occurs via endurance through the remainder of this MY and possible backward revisions in the future. However, the USDA lowered its projection of US ending stocks for several months below 2.0M bales during the 2010/11 MY – WASDE Cotton: Reduced Domestic Production and Ending Stocks
In fact, US ending stocks in the balance sheet referenced above dipped to 1.6M bales, but finally rested 1M bales higher.
Major sales cancellations on this weekΆs US export report were attributable to a medley of nations, most of which were in Southeast Asia, and none of whom were China. We may see further net negative US export reports going forward as the market attempts to raise US ending stocks by its sole remaining means – demand rationing. More readily available cotton in other exporting nations from this point forward will also likely make the switching of exports to other origins more feasible, while stronger currencies in these nations may make it less so.
The bullishness is likely not over for old crop cotton. Strong on-call sales remain against May (some of which may be rolled to July) and July and, according to the USDA, demand is a bit more brisk for the current MY as well. One must consider the fact that, although world aggregate ending stocks were marginally increased, aggregate ending stocks outside of China were reduced approximately 830K bales. While the S/U ratio, at 51.5%, outside of China is not particularly tight, it is off 2% M/M. And, in reality, any significant retracements are likely to be met with on-call sales fixations and enough new business to remind all of the tightness of US stocks.
Dec 14 performed admirably this week, surging ahead 155 points (nearly 2%) W/W, as it overcame formidable offers at every 25 point interval above the 80.00 level. Weakness in US currency, continued droughty conditions in West Texas and California, strong competing grain prices and strong exports against the 2014/15 MY were friendly to Dec.
Technically, Dec has another leg to move higher, and we expect it to do so, although some bull spreading against it may slow its progress a bit. We have said in this column, on several occasions since Dec, 2013, that we expected Dec 14 to reach the low- to mid-80s. The first part has occurred, as for the second, I suppose it just depends on where oneΆs lower range of “mid” commences.
For next week, at this time and with no significant, unexpected bearish news being made known to the market, we expect the front month to settle a bit higher than this weekΆs 90.45 if net sales on the US export report rebound to near 60K, or so, RBs (with accompanying strong shipments). Another near flat to negative export report could spur July to a W/W loss. Unless large negative net sales are seen on this weekΆs export report, we expect the front month to trade a range of 89.85 – 93.50 on the inside or 89.00 – 94.50 on the outside.
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.
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