The front month and Dec 14 picked up 94 and 77 points on the week, respectively, largely on the continued prospects of very tight US 2013/14 ending stocks. Dec received a hand from weather concerns and a strong Nov soybean contract. Results were on par with the conditional prediction that we put forth at this time last week. Except for one intraday sell-off and recovery just prior to the US export report on Wed, trading was subdued in a week in which very few delivery notices were issued against the expiring May contract. US export sales against the current MY were pleasantly surprising for the second consecutive week; more so this week than last.
And yet the market failed to respond with even so much as a jab at the 94.00 level, much less at recent rolling front month intraday highs.
The US has logged approximately 227K RBs of total cotton exports over the last two sales reporting periods; approximately 150K RBs (66%) of those sales have been to China. Across all other geographies US sales are abysmal. Mills within China have import quota in hand, and they are obviously purchasing US bales with a portion of it. For the time being, it seems that China is shouldering the greatest responsibility for holding front month futures above the 90.00 level, even as the July – A-index spread has recently dipped (intraday) to less than 100 points.
Credence is lent to the current lack of competitiveness of US stocks by the recent steady increase in US certificated stocks that has accompanied the weakening of the July – A-Index spread. Since the April WASDE release I have seen nothing within the weekly US export reports that prompts me to believe that the USDA will change its current MY export projection.
This could, however, change over the next two weeks.
Next week will be report-laden, especially with respect to US economic data. This data will no doubt affect the value of US currency and thus the value of commodities in general. This is especially true of cotton as the US is the primary residual supplier to the world and because US cotton is already struggling with competitiveness.
If Federal Reserve chairperson Yellen can manage not to again remind all who will listen that US interest rates must eventually ascend when she addresses the press on Wed (after the FedΆs latest interest rate decision is released) the US cotton industry will likely be done a service.
The export report will likely feature some reduction in net old crop sales, if for no other reason than the assay period was shortened by the marketΆs Good Friday sojourn (which endures a bit longer within the EU). The price structure is a bit less friendly as well with volume weighted average price and average daily lows each about 80 points greater over the sales period to be reported upon vs the previous sales period.
The A-Index over the assay period ending April 24 averaged a mere 90 points vs 153 points for the period ending April 17, as well.
Technical analysis for the front month suggests that the trading range will likely be symmetrical with a slight bias toward a move lower. Fundamentally, the market must collectively decide if a 2.5M bale (or even a bit less) carryout is feasible and, if not, at what point it will need to augment the spread between US and world prices to prevent China from continuing to be a relatively large net buyer.
Support is built in near 90.00 via ChinaΆs willingness to buy and considerable on-call sales against the July contract yet to be fixed. Further, speculative funds and holders of non-reportable positions, combined, added to their futures only and futures and options combined net long positions for the week-ending April 22 at front month futures prices north of 91.50.
New crop fundamentals have changed little from last week. Droughty conditions in Texas and California, planting delays in the mid-southern and southeastern states, production estimate decreases for Australia and China and the maintenance of a very tight carry-in will likely continue to offer support to the Dec contract. A recently released forecast for less than optimum monsoon rainfall over India and Pakistan for the coming season and Nov soybean contract strength may lend a hand, as well. Producers may be “sprouting horns”, it seems. This weekΆs on-call report showed an increase in on-call purchases by merchants, but little evidence of fixation of price.
For next week, you guessed it, conditional on the front month – near unchanged to higher for a similar export report as was seen this week, lower if net sales are near flat or negative with a trading range of 90.50 – 94.50 on the inside or 89.00 – 95.25 on the outside. For Dec, we think it will likely overcome a few more hurdles yet – near unchanged to higher.
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.
