Both July and Dec traded subdued ranges on the week as futures prices continued to grind lower. July gave up 254 points and Dec 137 as the spread continued to weaken. We had expected a bit more from the week, but it was not to be.
The market spent much of the week coping with last weekΆs upward revised carryout for the current MY. Most likely, on-call sales fixations and some fresh business kept the front month afloat while OI continued to steadily build against Dec, which is hopefully a harbinger of better days ahead – potentially in the very near future.
Cotton was also not helped by recently found strength in US currency that pushed the US Dollar index above 80.00 once again. The index gained 1.25% on todayΆs close vs its low from last week
The price structure over the export sales reported upon this week was less friendly than the previous period, and the July – A-Index spread and D/D increases in certificated stocks continued to belie the non-competitiveness of US cotton against other exporting nations and regions. Still, the US managed 36.4K RBs of total net sales against the current MY (a number closer to keeping pace with the USDAΆs previous export projection that the recently revised one) while the shipment pace remained very strong at about 227K RBs. Sales cancellations were nearly non-existent.
Sales against the 2014/15 MY were abysmal, but it is only May; current sales outpace those of this time last year (another year when exports were expected to be off) and the US is already nearly 18% committed against the USDAΆs revised 9.7M bale export projection for the coming MY.
To date, the 2013/14 crop is nearly 98% committed against the USDAΆs 10.4M bale export projection and 83% either delivered or en route to its destination. Net sales must average a mere 21.5K RBs and shipments approximately 144K RBs in order to hit the USDAΆs target.
For the longest time (as we noted here) we expected the USDAΆs 2013/14 carryout to rise from 2.7M to 2.8M bales. However, we did expect some sales cancellations and net negative export reports to be forerunners of such occurring. Further thought, however, allowed us to see several reasons that this MY could not be likened to 2010/11 and believed that a carryout of 2.5M bales, or less, was possible. This weekΆs trading action may bring such closer to a reality if it is show on subsequent export reports that fresh nearby business has, and is occurring.
The on-call report was not interesting for the current MY with sales commitments nearly unchanged against July. The report period did not cover any of the period for which strong fixations are expected to have occurred. With respect to the coming MY, on-call commitments by mills continue to build and producers are fixing a bit more of their commitments.
Next week will be a relatively light report week; likely, the report to bear the most weight will be the US export report. The volume weighted average price and average intraday low prices over the period to be reported upon are at approximately a 250 point discount vs the sales period reported upon this week. The July – A-Index spread, while still thin, has also steadily increased (now at 219 points). And, the last sales period (week ending April 17th) that the market traded significant time below 91.00 nearly 133K RBs of cotton were sold. We do expect export sales to increase W/W.
Technically, both daily and weekly, things look bearish. However, a market was not long ago overbought is now oversold. Ditto for Dec.
Fundamentally, the market will continue to assess regional tightness (e.g. the US) amid a world that is awash with cotton (basically China) and the nations that hang in the balance. Although ending stocks outside of China are expected to increase, a significant portion of that increase is attributable to the US. With rain refusing to fall from the sky over West Texas and California, it is very much in doubt that the US will produce significantly more cotton in 2014 than it did in 2013.
We have laid our bets that the USDAΆs 3.9M bale projected carryout for the coming MY will tighten considerably, just as it did over the current MY.
For the week, weΆll take a deep breath before going out on the limb and calling for near unchanged to higher next week for both July and Dec. The market can certainly move lower – especially the front month – but some upward correction should be in order before too long.
The expected trading range for July is 89.00 – 92.50 on the inside, 88.00 – 93.50 on the outside; for Dec weΆll call it 81.50 – 84.00 on the inside and 81.00 – 85.00 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.
