This was the week that the sharp spike in futures prices that we (and many, many others) have been talking of for some time now finally occurred. The addition of a heat wave to the West Texas drought, continued concerns regarding northern India and Pakistan, and a burdensome on-call position are thought to have formed an aggregate bullish market push that ultimately forced short-covering. An increase in ICE margin requirements likely also helped to push prices higher on Wednesday before a significant market retracement ultimately occurred.

The landfall of Alberto over AL, FL and GA, while doing this year’s cotton production prospects for the region few, if any, favors, felt largely like a non-event.

It is worth mentioning in this spot that a friend within the trade, who shall remain nameless, reminded us that CFTC on-call cotton data is not subject to an audit process. Other market commentators and pundits have recently called for the continuation of the report, citing the need for market transparency, despite other industry members calling for its abolition. We agree with the pundits about the need for transparency, and we feel that an audit process for merchant-reported data would greatly increase market clarity.

To be clear, we are not accusing anyone of anything nefarious, but if the market is truly trading such data as heavily as it appears, then the potential for an audit of said data seems in order.

On the demand side, total net sales against 2017/18 were significantly lower Vs the previous sales period while sales against 2018/19 were higher; shipments were off, but strong, at approximately 383K running bales.

We continue to believe that exports for 2018/18 will be around 16.4M 480lb bales.

We think that sales and shipment figures put forth within the latest report are ultimately supportive of ICE futures prices, but not at current trading levels. Sales accomplished against 2018/19 were accomplished at nearly 1000 points off where Dec traded to over the holiday-shortened week, setting up the potential for a disappointing sales report for the week ending May 31.

Internationally, China has sold all reserve stocks offered at its auctions for two weeks running, which is telling of the nation’s domestic demand and concern regarding its 2018 production potential.

In geopolitical news, the US has imposed tariffs on steel and aluminum imports from Canada, the EU and Mexico and such could eventually lead to duties on US exports into these nations/areas.

Some commentators have noted that cotton in the 90s is not sustainable and we agree. That is to say those futures prices northward of the 90.00 level have never been sustainable. Given the crash in worldwide demand that occurred post ICE cotton futures enduring a long run above 90.00 (and eventually to around 2.35) in 2010 and 2011, it is difficult to see how prices above this level were ultimately sustainable.

On the other hand, sustainability isn’t the key concept in the near-to-medium term. Producers have taken good advantage of Dec’s run to the mid 90s, and we believe opportunities could persist in that general level for the next week or weeks, given the weather challenges US, Chinese, and Indian producers are facing.

With that said, many producers are nearing or exceeding the 75% level on their forward contracting, and that’s a risky place to be with 5 months of weather standing between contracting and delivery. Put options are looking like an ideal way to take advantage of this market, leaving open the possibility of selling spot cotton into a strong basis in the fall if one is blessed with good yields and/or quality.

For next week, the standard weekly technical analysis for and money flow into the Dec contract remain bullish, with the market now significantly overbought. Index funds will continue to roll out of long July positions as the market prepares for the release of the June WASE report, slated for release on June 12.

Have a great weekend!