Cotton bulls were modest winners on the week with the Dec and Mar contracts gaining 52 and 66points, respectively, leaving the Dec – Mar switch at 5points of carry.

How many ways are there to say the same thing?  The market is range bound between 66.50 and 70.25, but this week’s trading was especially constricted, with a range of a mere 142 points.  The upper end of the range occurred over the final two trading days of the week, following the release of constructive, but weakening (Vs the previous two sales periods) export sales data.  It is the same story, only with more interesting synonyms and more (or less) descriptive adjectives.  In reality, save for a few fireworks on Thu, the week was akin to watching paint dry.

The market remains capped by producer selling/trade hedging near and just above the 70.00 level and cupped by a willingness by mills to fix on-call commitments from around 66.50 – 67.50. The market will likely need to traverse northward periodically, as bales need to be sourced to fill the supply pipeline and perhaps by modest quality concerns in West Texas.  On the other side of the equation, mills had (on Oct 27) an on-call position of 14.1M bales, with more than 2M bales of that position remaining to either be fixed basis Dec or rolled forward.

For next week, the standard weekly technical analysis for and money flow into the Dec contract remain bearish, but the Dec contract is beginning its swan song and trading action from this point forward will likely be more framed by the evening of positions and upcoming USDA reports than technical factors.  ICE certificated stocks remain tight, but did increase around 26K bales on the week.  This is not bullish.

Scheduled index fund rolling continues next week, with the vaunted Goldman roll scheduled to commence on Tuesday, Nov 7; the S&P, Dow Jones and Deutche Bank indices are also slated for rolling maneuvers.

The current consolidation will have to end at some point in time, and the longer the market consolidates the greater the rally or break is apt to be.  Still, it seems to us that the current trading range could endure a while longer.  Perhaps the WASDE report’s release on Thursday, Oct 9 will provide some unexpected fundamental nugget to nudge the market from the doldrums.  We will devote time this weekend to an effort in elucidating from whence any such nugget(s) may be revealed.

The US cotton harvest has reached the halfway point and ginning operations are now running full shifts around the clock over much of the cotton belt.  With each passing day, more and more bales are being receipted and classed as merchants and cooperatives are quickly applying bales for shipment against the larger than usual existing sales on the books.  There have now been 4.7 million bales classed which is 22% of estimated production.

Cotton grades thus far have been exceptional with 81% of the classed crop tenderable against ICE futures. One area of concern that merchants and cooperatives are paying close attention to is the low micronaire (unmatured fiber) coming out of West Texas. The Lubbock classing office has reported 47% of the bales classed thus far have fallen in the micronaire discount range of 34 and lower. The Lamesa office is reporting 17% in the low micronaire category. These bales will bring a minimum 2 cent discount to the grower in the USDA loan program and could even bring larger discounts in the open spot market.

On the spot market, the early season “fill the pipeline” premium continues to be a factor, but the consensus among brokers and merchants is that that basis will widen in another week or three when the flow of cotton into the marketing chain exceeds the flow of cotton to mills.  If, however, the Texas crop continues to have a micronaire problem, and if the Delta crop continues to show higher than normal leaf, the premium could continue for middlings with base or premium micronaire and strength.

For yet another week, our advice to producers is to sell recaps into a strong basis.  For growers harboring bullish sentiments, selling spot cotton and buying calls is far safer than simply holding cotton and being 100% exposed to market and basis risk while paying the warehouse for the privilege of waiting.  Unless your brother-in-law owns the warehouse, you should let someone else own your cotton before the end of the year, if not sooner.

Have a great weekend!