Demand for US cotton has been near rampant since early October. It seems the aggregated export reports (post the USDAΆs furlough last autumn) were merely a harbinger of things to come. The time the market spent below the 80.00 level helped, but takers of cotton have followed the market higher, and a late US crop, quality concerns and increased world and domestic demand for US cotton compelled the market to ration demand.
We believed the market would need to remain static or push higher in order to accomplish any rationing, but the USDA will provide the measuring stick via the weekly US export report next Thursday.
Over the past two export sales report periods the US has logged in excess of 750K statistical bales of net sales and in the neighborhood of 500K bales of shipments. The sales were accomplished over the 10-day aggregated sales period with a volume weighted average price (VWAP), basis Mar 14, of 83.96 with a relatively strong US Dollar Index.
For the sales period to be reported on next week the VWAP is 87.39 and the US dollar was a bit stronger over the period, as well. The holiday-shortened sales period means that next weekΆs sales should be viewed on per day basis.
Despite todayΆs strong export report, the market failed to charge northward. The few fireworks that were seen, only moments after the reportΆs release, were likely the result of short-covering.
The front month has little effective life left. In about three weeks the lead open interest will roll to May 14 as funds roll their longs into deferred months. And the standard fund rolls, combined with on-call purchases yet to be fixed and profit-taking, should be sufficient to drive the front month lower over the coming week.
It was a very slow news week for cotton. While there is always the din of political positioning regarding the farm program, the most pertinent news came from China. Officials announced that the country would cease stockpiling cotton and soybeans this year in favor of a subsidy-based program.
For cotton, the program is to be implemented on a trial basis in the northwest growing region of Xinjiang, where cotton production is more organized, produces higher quality, and is easier to survey with respect to area and production.
Specific details were not provided regarding the level of subsidies, even in a separate announcement the day following the initial announcement. The gist is this: China will regulate cotton production within her borders and procurement from imports as she deems necessary and appropriate.
Still, the fact remains that the worldΆs largest user of cotton cannot produce enough of the fiber, especially in the qualities desired, and there will be continued demand for US cotton into China via import quotas or other means, even as her massive stockpile is measurably reduced.
Concerning the effect on US cotton prices, the end of the stockpiling of soybeans may have been the most damaging blow to the US new crop; should soybean prices fall measurably, there will be less pressure for Dec 14 to reach higher.
Concerning Dec 14, the US situation still looks to grow tighter. Our analysis on todayΆs ginning and classing data lead us to believe that production will eventually rest very near 13.0M statistical bales. If not, export sales, and perhaps a small increase in domestic use should bring 2013/14 ending stocks south of 3.0M bales. This leaves us friendly Dec 14, despite the news from China and this weekΆs retracement from 80.00.
The coming week is scheduled to be another slow news week, but without having done the hard analysis yet, we would expect the front month to move lower somewhat while trading a range from, 85.00 – 88.00 on the inside or 84.00 – 88.50 on the outside.
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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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