ICE Dec futures gave up 109 points this week on relatively heavy volume, settling at 62.76. This weekΆs outcome was on par with expectations put forth in our weekly cotton and grain report last week. Cotton was the largest mover among the US Ags, with major grain markets finishing the week near unchanged.
The Dec contract extended last weekΆs impressive move higher nearly another 100 points this week, breaking through (and settling above) strong technical resistance near 64.20 along the way. But the timing was all wrong for it to continue on Thursday. The Dec contract had become overbought and could not move higher on export sales that, while significantly greater vs the previous week, were again well short of the required pace to hit the USDAΆs export target and plummeted to a 171 point loss.
Rains across TX were less severe than expected in the most concentrated cotton production areas, which was a boon for our friends in TX, but contributed to the crash as well. The phrase “buy the rumor, sell the fact” figured prominently in many analyses. The trade seemingly won in its selling against optimistic specs as the market prepares for scheduled fund rolling – the RogerΆs roll begins on Thursday next week.
In the US, field reports suggest that overall TX yields may be a bit greater than previous expectations and reports from MO and southern AL continue to be encouraging. But yields from the remainder of the Mid-south continue to hold the status quo of recent weeks. That is, overall, yields are somewhat below their 5-year averages. In NC, SC, VA and parts of northern and eastern GA reports are confirming that recent heavy rains and flooding did more damage to this seasonΆs crop than originally thought. Some reports indicate that some counties in SC will suffer a total loss.
An examination of USDA-RMA insurance loss data suggests that this will likely be a profitable year for crop insurers. Loss ratios, while slowing moving higher each week, are well below their historical averages, especially in TX. But, this crop is late, which seldom is positive for yield; ditto for quality. To date, USDA-AMS has classed just above 2M bales this season, only 57.7% of which are deliverable against the board.
Although I can hear the limb creaking, I would guess that this seasonΆs US crop will do well to log final production at 13M bales.
The world aggregate crop also seems to be moving southward with respect to both production and quality. Quality issues are noted in China, India, Pakistan and the former Soviet Union, which was ravaged by drought this year.
Still, it is demand for our fiber amid macroeconomic concerns that is seemingly keeping the specs at bay and mill buying in hand-to-mouth fashion. Strong US currency also continues to play a role in tepid export demand for US stocks.
We are seeing a very strong basis (200 to 400 ON the Dec contract, rule 5) for producer cotton as merchants compete for higher grade cotton, particularly that with base or premium micronaire. Given the marketΆs reluctance to sustain a medium to long term rally, we would encourage producers to take advantage of this basis, as the gains to be had in early basis may out-pace the potential gains to be made from a future 2-4 cent rally. At some point, merchants will have their quality needs met, and the basis will likely widen by 200-500 points from current levels.
For next week, the standard weekly technical analysis for and money flow into the Dec contract remain bearish ahead of scheduled index fund rolls with volatility expected to either increase or remain near its current level.
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
