The bull and the bears fought to a draw this week on ICE Dec futures while the bulls notched a decent win in Mar, with the inaugural 2018 futures contract gaining 81 points. The Dec – Mar spread weakened over the course of the week, but remains inverted at 21 points.
Back when we were searching for a parcel of land upon which to build a home, my father-in-law (a life-long general contractor) incessantly preached to us the same 3-word sermon: “Location, location, location…” (Actually that’s just one word, repeated 3 times). And we continue to do much the same regarding the current demand environment for cotton: “Demand, demand, demand…”
The notion is, of course, that these factors provide underlying support to real estate and cotton markets.
Demand is not merely strong (or even outstanding) but is now approaching unprecedented. The US has, to date, sold approximately 4.5M 480lb new crop bales for export shipment. Old crop sales remain nearly as strong, given the scarcity of remaining stocks left without commitments against them.
Over the last 3 consecutive sales periods, the US has sold around 2M 480 lb bales against 2016/17 and 2017/18 combined.
Domestically, as we move into the second week of July we are beginning to see more of this yearΆs crop entering the bloom stage, with peak fruiting soon to follow. Our maturity assessment still relays that the crop is a little behind schedule, not quite late, but certainly not early.
The Midsouth and Southeast have continued to receive plenty of moisture, which has continued to delay field work and spray applications for increasing insect pressure. We are not sold on the notion that there is such a thing as too much rain in the Mid and Deep South regions in the middle of summer, but many growers we know would appreciate a break in the rains and thunderstorms in order to make lay-by applications of herbicides. Pigweed enjoys a wet summer, too.
At the very least, producers have saved a great deal of money on irrigation costs (so far) this year, which should improve their respective bottom lines.
News from Texas over the week has been a mix of beneficial rains and damaging wind and hail. Recent rains across West Texas and Oklahoma have undoubtedly improved crop prospects, and we are attempting to re-evaluate and quantify abandoned acreage, which is always a challenging task.
On the international front. the USDAΆs attaché in India has projected 2017/18 production at 29M bales Vs the USDAΆs June projection of 28M due to increased monsoon activity. This has encouraged producers to opt for increased sowing of cotton vs pulse crops.
Recent droughty conditions across ChinaΆs northeastern provinces have somewhat alleviated the dry weather, while concern persists that flooding across the Yangtze River Valley may have resulted in loss of some cotton area.
There are only two more trading days until it is WASDE report time again, which means that we have plenty to do this weekend.
At this time, we suspect that the USDA will project world production higher Vs June while also thinking that an associated increase in the projection of world aggregate consumption might substantially offset any such enhancement on the supply side of the balance sheets. We published a domestic production projection of 18.35M bales last week – after the release of the USDAΆs annual acreage report and just prior to the occurrence of additional beneficial rains across West Texas. At this time, we will go with a range of 18.25M – 18.75M bales, mostly depending on how aggressive the USDA adjusts (if at all) its most recent abandonment estimates and, to a lesser degree, its state-wide yield projections.
For what itΆs worth, increased area for any particular crop (cotton included) is normally accompanied by lower overall per acre yields as more marginal land is brought into production.
We continue to advise producers to look to any rally over 70 cents on the Dec contract as a pricing opportunity. Dec has looked decidedly friendly since June 23, and we could reasonably expect to see a decent weather rally in the next few weeks, but the prospect of a large crop will favor short sharp rallies over long term bull moves.
For next week, the standard weekly technical analysis for and money flow into the Dec contract remain bearish, but fundamentally, the market seems to have located a bottom, at least temporarily. Still, next week is mostly about the WASDE report. We do not expect, at this time, that the report will be bearish, but the USDA is prone to producing surprises…
Have a great weekend!
