It was another down week for cotton futures with May and Dec giving up 42 and 74 points, respectively. However, most of the severe downward movement for the week was accomplished on a break below last yearΆs continuation low of 57.05 on Mon, from which the market swiftly recovered from a limit down move in the May contract. Both old and new crop inversions strengthened this week.

US export data from the week ending Feb 25 was improved significantly vs the previous sales period, but given price metrics over the two periods, total net sales were not especially impressive. However, they were likely strong enough to compel the USDA to stand pat on its 9.5M bale export target.

Rumors circulated early this week regarding an official announcement from China regarding release of a portion of its massive stocks. But the announcement never came. Instead, there were more rumors alluding to a possible announcement in mid-March or April.

China has amassed huge volumes of both cotton and corn in its recent stockpiling initiatives. While ChinaΆs reserves of maize will likely have great difficulty in replacing US production as the bellwether factor affecting CME corn futures prices, it is a very different scenario with cotton. With respect to cotton, China is in the driverΆs seat.

China replenished (then flooded) its state reserves with both domestic and imported cotton in an effort to hold cotton at or below the $1.00/lb level (domestic) within the foreseeable future – a runaway scenario during 2010 and 2011 that proved quite painful for the worldΆs largest consumer of raw cotton.

Mission accomplished.

Yes, there was that tightness in US and “World less China” stocks that ran old crop futures to nearly $0.98/lb nearly two years ago – and that coaxed new crop futures to nearly $0.85/lb before the ensuing crash. However, once our market traded definitively below the $0.70/lb level in 2015 it has not looked back (or up).

Given that China stocked itself to the brim with cotton in an effort not to let the market run away again, we should not be surprised that no announcement came this week. That is, the market broke on the strong rumors of an announcement and China got what it wanted without having to officially commit to releasing a single bale. Why give away their cards? If one can entice everyone at the table into folding, there is no obligation to ever show oneΆs hand.

This scenario is likely beneficial for China due to the aging status and overall suspected poor quality of its reserve stocks. The Chinese have found that actually selling their bales at inflated prices is nearly impossible and will also likely be challenging at competitive prices.

An official announcement will eventually come. Perhaps it will be next week ahead of the USDAΆs March WASDE report. History tells us that whenever it is it will likely be unexpected. Further, the announcement may very well be that the release has been postponed to mid-late summer (or maybe even early autumn). Again, China has accomplished its basic goal without having to further publicly reveal anything regarding the competitiveness of its stocks. A release now could be counterproductive, especially if its stocks are truly of largely poor qualities.

What does this mean for US acreage in 2016?

Well, if weather cooperates, we hear many that say that the US price support system (including USDA-RMA reinsured insurance programs and gin rebates) will still entice increased acreage even if prices remain near their current level. IΆll take the “unders” on that bet. Cotton is simply too capital intensive to add acreage in the right areas when prices are in the cellar.

Although few alternatives look to be profitable for 2016, some are inherently less risky than cotton on the input side. US price support and the large number of producers participating in cooperatives in TX (seed revenue) and restricted choices with respect to alternatives may push acreage higher there.

If 2015 had been a relatively easy production year with better yields than were actually realized in most US geographies I could get on board with the prevailing opinion. But the aforementioned criteria are simply wishful thinking. 2015 hurt many of our producers.

The more important prospect, however, is that with cotton planting expected to begin this month in Northern India, Pakistan, Turkey, Greece and to continue in other regions, world planted area is very likely to fall from recently published expectations.

Even with an expected year-on-year increase in aggregate average yield, it is plausible that the world could produce less than 100M bales of cotton in the upcoming marketing year, which would likely be supportive of both futures and cash prices at some point during 2016 and/or 2017.

It is difficult to chart a conservative course for producer marketing in this environment. We hear daily from producers nervous about even deeper sell-offs, and trying to evaluate forward contracting options that seem less than ideal.

One marketing consultant we occasionally visit with has advised his customers to turn their cell phones and internet off for the next 30 days. He makes a strong argument that we are likely looking at the worst prices of the year, and that better marketing opportunities are more likely as the season goes on. We think this may be sound advice.

One strategy that does merit consideration is the purchase of Dec16 calls. It is difficult to imagine a season without at least a few weather rallies, and Dec certainly has the potential to trade to the mid 60s on weather or crop problems. With long range forecasts calling for a wet stormy spring and a hot dry summer in the high plains and the Delta, weather rallies are likely.

For next week, the standard weekly technical analysis for and money flow into the Mar contract remain bearish. Some noted and respected analysts have voiced expectations for a recovery of old crop futures into the 60.00 – 65.00 range; however, we continue to think that an official announcement from China on the release of its reserve stocks is likely required ahead of any solid correction.

The USDAΆs March WASDE report will be released on Wed, March 9. It will be April, at the earliest, before the US balance sheet changes significantly for the better (without a backward revision, which can occur). The same seems to be the most likely outcome for the aggregate balance sheets, as well.

Have a great weekend!