ICE cotton futures were on the defensive this week with the July and Dec contracts giving up 194 and 135 points, respectively, on the week. The July – Dec spread remains inverted, but also came under pressure this week, giving back 59 points in July premium.
This week’s drop in ICE futures prices seemed to be fueled by spec profit-taking/liquidation and was partially, at least, tied to the poor demand for US cotton for export across recent weekly sales periods. Net old crop sales have dropped below the weekly pace required to meet the USDAΆs export target while shipments are now exceeding the weekly pace requirement. Old crop export sales have not been particularly strong since the market was trading significantly below the 60.00 level.
Additionally, the selloff was likely enhanced by position evening ahead of the USDAΆs May WASDE report.
Early sales from reserve auctions in China have been extremely strong at nearly 100% of the 30K MTs (138K bales) that have been offered daily. Stocks offered thus far have been from the 2012 and 2013 crop years and have been about 2:1 import Vs domestic stocks; it is reported that the majority of imported stocks have been of Australian origin.
The International Cotton Advisory Committee reported this week that the daily limit offering for reserve sales has been raised from 30K MTs to 50K MTs (230K bales). Again, we do think that strong reserve off-take is somewhat bearish over the near- to medium-term.
As of May 1, the US crop was officially estimated as 16% sown, but strong progress is thought to have occurred this week. While many areas are still too wet for planting, soils are drying amid temperatures that have improved for cotton germination. Still, we continue to hear of cotton acreage being switched to soybeans.
Next weekΆs premiere event will, of course, be the USDAΆs May WASDE report, scheduled for release on Tue, May 10. Most published analyst projections show an expectation for US production, exports and ending stocks at 14.5M, 10.5M and 3.95M, bales respectively. Our projections are 14.55M, 11M and 3.6M bales, respectively.
At this time of year, many producers find themselves so busy with planting and field work that they worry about missing out on marketing opportunities. But this isnΆt a typical year.
WeΆd never encourage a producer to ignore the market or current contract offerings, but the current lack of aggressiveness on the part of merchants, combined with a market that appears to have a few cents bullish potential may make this the week to focus on getting your crop in the ground and leave the worrying to your local buyers and ginners. If next week should bring a surprise rally, a call to your options broker will likely be in order, but in the meantime, weΆd recommend enjoying the weather.
For next week, the standard weekly technical analysis for July has turned bearish while money flow remains supportive. Export sales for the week ending May 5 are likely to be lackluster, but shipments may continue to strengthen. A WASDE projection of 2016/17 US ending stocks below 3.4M bales would be bullish, while a projection approaching 4M bales is likely to incite a bearish reaction.
Have a great weekend!
