Dec. 13 cotton futures closed the week ending August 23 at 84.08, down 924 points on the week (the largest one-week percentage decline in 5 quarters). Dec 13 traded a 963 point range for the week, opening near its top and closing near its bottom.
The low coming at the 83.91 mark on Thursday. Dec 13 volume for the week is estimated at a very heavy 109K contracts traded with OI contracting to approximately 145K contracts on Thursday.
The Dec 13 – Mar 14 spread narrowed dramatically during the week, opening at 286 points to settle at less than 75 points on Friday. ICE certificated stocks continued to dwindle as the week progressed, falling just over 8K bales to rest at just above 34K bales remaining. Since mid-July ICE certificated stocks have been reduced in excess of 500K bales.
The Cotton Outlook A-Index retraced 750 points on the week to settle at 89.85. Cotton futures in China (CZE) were slightly lower on the week. The grains finished the week mixed in extremely volatile trading action that in no way resembled the swan dive that the cotton market experienced.
In our last weekly summary and report, we postulated that any near-term correction in the cotton market would need to coincide with managed money entities decision to liquidate some portion of the massive long position that they had accrued over the past weeks.
At this time last Friday, we saw that the market could, potentially, reach the 95.00 – 96.00 level on technical factors, but that was not to be.
Several factors contributed to the collective liquidation of longs by the funds this week. Among them were:
Reports from the Cotton Association of India and Cotton Outlook estimating 2013 Indian production at just over 29M bales (US 480s).
An unexpected uptick in the weekly crop progress report (USDA-NASS).
Growing concerns over the weakness in Indian and Brazilian currencies (both are major cotton exporters).
Continued lackluster demand as evinced in ThursdayΆs export and cotton on call reports.
It was generally accepted that ThursdayΆs export report would resemble the one produced the previous week, but at first glance it was surprisingly upbeat – 81K+ running bales (RBs) total net sales with the only major cancellation (approximately 10KRBs).
This data, though by no means bullish, was far above the expected numbers of less than 50K net, seemed to support the market for a short time until the analysts delved into the destination geographies of the sales reported. In excess of 19K RBs were sold to drought-stressed Turkey and 39.5K to Latin American entities, which are basically a collective, captive market for US and Brazilian exports.
China was credited with 14K RBs of net sales while the rest of Asia was nearly nonexistent on the report. Additionally, the report listed in excess of 10K RBs of boutique sales of Pima (ELS) type cotton, which does not exactly ascribe to the same set of supply and demand statutes as does its upland counterpart. Hence, we do not believe that the report was at all positive.
Looking forward to next week, traders will wait to see if the US crop has improved further via the weekly crop progress report form USDA-NASS as well as the weekly export report on Thursday. We think that the trade expects the report to once again be light, and we agree.
Despite the cliff-drop that Dec 13 experienced this week, it has found solid support at the 84.00 level, attempting for the last three days to close below it, and failing to do so each time.
Technicians will note this as they look toward the 83.00 level which is within a narrow range between the 100- and 200-day simple moving averages, where greater support is expected to be found. A portion of the support at 84.00 is reportedly due to light volume physical business, while most current business is being done base to Mar 14.
In all, we do not see much, fundamentally, that is not already known to push the market lower. If it occurs, it will almost certainly not be due to producer sales or fixations, but rather to technical traders and the influence of outside markets.
At this time, we think that that the fate of Dec 13 for this week is relatively flat to a slight improvement, barring another week of surprises.
Louis W. Rose IV, PhD, MBA, grew up on a cotton farm in northeast Arkansas and has been involved in cotton his entire life – starting in his familyΆs fields, then as an Extension scout while attending the University of Arkansas and later as a crop consultant, operating his own firm before transitioning into a career as an agricultural analyst in 2000. He is a former Global Cotton Analyst with Cargill Cotton where he developed predictive statistical models for the firm. Rose currently provides analytical services. Contact: info@rosereport.com.
