ICE cotton contracts finished the week with slight gains, despite spending the majority of the week’s trading action northward of last weekΆs settlements. May futures picked up a point on the week at 57.16 while Dec futures added 8 points at 56.90.
The US is amassing a large amount of export sales commitments – for the week ending Mar 10 the net total against 2015/16 was just shy of 250K running bales – but shipments remain stubbornly slow. Futures prices certainly seem to be at a level where business can be accomplished and aggregate on-call sales are again increasing. Still, mills will likely not commit fully even at current prices until China makes an announcement regarding its planned reserve release.
Some traders and analysts have voiced opinions that an announcement is imminent, but there is a growing consensus that sales will likely not commence until mid- to late April at the earliest. As long as prices remain near their current level, we refuse to hold our breath waiting on a commitment from the Middle Kingdom. Given ChinaΆs past behavior, however, we think that an announcement could occur just ahead of the USDAΆs Mar 31 planting intentions report. But the announcement could very well be vague, leaving China the latitude it might deem in its best interest with respect to offloading its stockpile.
There have been a variety of analyses put forth to predict 2016 US cotton acreage. At this time, we would argue that a large percentage of lost corn acreage might find itself sown to soybeans, as prices are moving higher while Dec cotton futures do little more than stagnate.
The projected returns that we see published have 3 major caveats:
the first being that the returns are mostly in reference to variable inputs,
the second being that the returns are based on either a historical average or trend line expectations of yield,
and the last being that grades are at least near expected levels. Many US cotton producing operations did not qualify for par on the latter two of these items in 2015.
Therefore, we think that cotton acreage increases may be limited to areas (outside of TX) that saw both good yields and high grades in 2015. We believe 9.4 million acres is a very optimistic number for US plantings in 2016.
There is one fresh topic that merits discussion.
India, which heralds itself as the “largest free market in the world” is imposing price restrictions on biotech giant and pioneer Monsanto with respect to its wares. I will note here that I do not now, nor have I ever, owned a single share of Monsanto stock. I also have never been employed by the US conglomerate, so my position is fairly objective. My opinion is that India is making a huge blunder.
It would be interesting to be able to quantify just how much of IndiaΆs recent impressive improvements in cotton yield are attributable to MonsantoΆs GMO traits and breeding. But, the powers that be in India have deemed the price too high.
Certainly, Monsanto could pursue legal action in the Indian courts, but that would likely prove to be an exercise in futility. One might expect US trade representatives to take an interest in the issue, but recent reports from Washington indicate only passing interest to date.
If India does not reach an agreement with Monsanto, it will likely hobble itself with respect to garnering superior technology from foreign companies – at least not without a hefty down payment. Further, unless things have changed dramatically since I toured the nationΆs cotton producing regions four years ago, Indian yields will suffer, as will quality.
Such does not bode well either for IndiaΆs huge domestic spinning and textile industries or for its considerable export business. It certainly seems to us that India would do better to subsidize their producers for a portion of their GMO seed input expenses. Of course, the path India has chosen could potentially prove beneficial to US cotton producers at some point in the not-too-distant future.
Monsanto has thrown down the gauntlet by threatening to withdraw from India. Since they have done so publicly, it certainly seems that not making good on their threat would send the wrong message to other nations who might want to expel its foreign ventures in the future.
At any rate, you can bet MonsantoΆs attorneys and business development gurus will be working late hours for some time to come.
Our advice for producers this week remains essentially the same as last week. As long as China avoids announcing their short term plans for the reserve, any forward contract will necessarily contain a measure of protection for the buyer. Given the likelihood of weather rallies in the coming weeks and the eventual reduction in the necessity for extra protection in the basis we believe growers will have an opportunity to book for prices 3-5 cents higher than current offerings.
Also worth noting is that there is serious talk about a one-time retroactive cost-share ginning subsidy for the 2015 crop. One Washington staffer assured us it was a done deal for 2015, but that negotiations continue between the secretary and congress for a longer term solution outside the farm bill. Contact your legislators for more information.
For next week, the standard weekly technical analysis for and money flow into the Mar contract remain bearish. The market continues to await an official announcement from China on the release of its reserve stocks and the USDAΆs Mar 31st acreage survey report.
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
