Dec cotton gave up another 38 points this week while trading an inside range of less than 200 points. Sept and Dec corn and Nov soybeans were losers as well, while wheat posted W/W gains.
US new crop export sales were again significantly higher W/W at nearly 350K RBs while old crop sales continue to add to the current MYΆs tally at just shy of 11.1M bales. Shipments were off significantly, but they tend to be erratic at this point of the season.
Although the market showed little reaction to new crop business, it cannot be denied that business for US bales at current price levels is brisk. When accounting for the difference between the 2013/14 total commitments and the USDAΆs export projection of 10.5M bales, it can be inferred that the US is currently approximately 35% committed against the USDAΆs 10.3M bale export projection for 2014/15.
No doubt, the rash of demand uncovered by the current bear move has slowed the marketΆs southward progress. Still, this bear market was born on the supply side, which provides much more poignant shocks and deeper doldrums than does the demand side. The worldΆs current over-supply of cotton has forced cash prices around the globe lower for some time now. And at this time, it seems as if plentiful supply will not be an issue for the current season – there is little cause for the market to factor in significantly greater weather premium.
Rain and showers continue to fall over West Texas cotton fields, weather remains generally favorable over most cotton producing regions of the US and monsoon showers have increased over major Indian cotton producing regions. In the US, the largest weather issue, aside from the stubborn drought in California and a bit too much rain in pockets of Arkansas, is an outbreak of unseasonable autumn-like weather that has led to record setting low temperatures. It is my guess that this seasonΆs crop will withstand this rather pleasant sojourn from the dog-day norms of mid-July.
Things will likely become more interesting in the not-too-distant future, should US new crop sales continue to increase. This is a real possibility; given the 200 point volume weighted average price discount for the next sales period to be reported upon vs the week ending July 10, it is conceivable that new crop sales could top 500K RBs. US stocks, given what must be shipped against current MY sales plus domestic and captive export requirements, will likely be very tight. Sourcing physical cotton at or near current price levels is likely going to be a challenge for merchants. And, if they cannot buy physical cotton, it is our guess that they will, in fact, buy futures.
However, the aggregate speculative sector continues to sell and now holds a small net short futures only position of just under 1K contracts. They further cut their futures and options combined net long position by approximately 50% to a paltry 5.4K contracts. We postulated last week that the aggregate speculative community had likely become either flat or net short (futures only) ahead of last weekΆs bearish WASDE report, and this appears to have occurred.
For next week, our proprietary analyses suggest that similar market structures have better than a 3 in 5 chance of closing lower, but often near unchanged, while experiencing similar volatility levels, for the subsequent week.
We expect Dec to trade a range of 65.75 – 69.00 on the inside or 64.50 – 70.00 on the outside. Without significant news regarding supply constraints (i.e. export restrictions or natural disaster) rallies are likely to be short lived and underwhelming over the near term.
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
