It was a miserable week for the longs amid the initiation of scheduled index fund rolling periods and US currency that is again challenging par. The ICE Mar contract gave back 132 points this week, settling at 61.13. The Dec contract gave up 139 points as the promise of increased acreage in 2016 begins to fade.
As 2016 crop planting approaches, the demand side of the supply and demand (S&D) equation remains a concern. Despite favorable price action over the week ending Jan 21, US total net export sales were relatively soft at just below 160K running bales. Shipments were again disappointing at around 163K running bales.
While the US has sold around 550K running bales over the last 3 sales periods, shipments need to increase quickly in order to bolster investorΆs confidence in our market. The reduction in ICE certificated stocks this week to below 30K bales is somewhat encouraging.
Internationally, demand remains suspect amid strong US currency and the uncertainty surrounding upcoming offerings from ChinaΆs reserves. Rumors abound, some even suggesting that China will import cotton into its reserve to offset releases. While it is true that driving ICE futures into the 50s (or lower) will not enhance ChinaΆs efforts to rid itself of cotton, adding to their long physical position also seems 180 degrees from their medium- to long-term goals. Regarding their long-term plans,
China has recently been aiding a West African nation(s) with improving cotton production and quality in the region. Almost sounds colonial.
And so, we must continue to look to the supply side of the S&D equation to find market support. There is growing acceptance the 2015/16 world production will ultimately be realized at less than 100M bales (perhaps significantly so) and we do not disagree. With respect to US production, the data continues to suggest that the USDAΆs current projection of 12.94M bales is a bit overstated.
The National Cotton Council (NCC) will disseminate the results of its planting intentions survey on the morning of Saturday, February 7, at 9:00, EST at its annual meeting in Dallas. While we maintain the market needs to encourage total US planted area (upland + ELS) within the 10.0 – 10.5M acre range (on average would result in ~4M bales of US ending stocks), we see planted area of 9.7M acres as likely sufficient to maintain US ending stocks near 3M bales.
A recent Bloomberg survey showed an average US total planted area this year at 9.45M bales, which is only fractionally higher than last yearΆs NCC survey projection. Overall, I expect a small increase in NCCΆs planting intentions versus last year, but I will not need to pick my jaw up off the floor if the results are in the vicinity of 9M acres. Regardless of the relative prices for competing crops, spirits, in general, were not high during the surveyΆs response period.
Producers are starting to see a few forward contracting options, and to date, theyΆve gotten a lukewarm response. “Equity Escalators” (essentially an on call contract with a guaranteed minimum) are being offered by a few players, but their primary appeal seems to lie in a guaranteed minimum if the market falls well below the 60s.
Two factors are worth considering when evaluating these contracts. First and foremost, it is rare to see the high in the Dec contract in Jan. Spring and summer rallies are likely, and the basis currently being offered isnΆt appreciably better than the basis we currently expect to see in May or July.
Secondarily, if we review the 2015 forward contract prices versus 2015 recap prices, we see a virtually identical range and average. That is to say that last year, the market did not reward early forward contracting nor did it punish late spot sellers. We currently see no reason this should be significantly different in 2016.
Our advice for producers is fairly simple and straightforward this week. Remember that June is 4 months away, and a lot can happen in that time. DonΆt take a contract today that doesnΆt offer a profitable guarantee. Should you find a contract thatΆs too good to refuse, give serious consideration to adding Dec calls to your marketing plan, as planting and early season weather rallies are likely.
For next week the standard weekly technical analysis for and money flow into the Mar contract are bearish Next weekΆs export sales are likely to be supportive, while the market will begin to prepare for smaller US and world production estimates on the USDAΆs Dec WASDE report. Such may offset selling pressure from the index funds rolling out of Mar. But, most likely, China will need to provide some clarity with respect to its reserve plans prior to the specs wading much further in.
Have a great weekend!
The Rose Report weekly edition is published and made available free of charge as a courtesy to producers, ginners, merchants, agents and all others who have an interest in the cotton market. To obtain a free trial of the more comprehensive and up-to-date Rose Report daily and weekly cotton and grain editions, or to learn more about our other cotton analyses and analytic services please visit: http://www.rosecottonreport.com/.
