The ICE cotton contracts had a large week, with Dec settling at 70.57 for a 359 point weekly advancement. The Dec – Mar spread was halved Vs last Friday, settling at a mere 32 points of carry. In order to put this week’s strong upward movement in perspective, consider that it occurred at the same time that the US Dollar Index was gaining around 1.4% over the same timeframe.

It is plain enough, cotton bulls were the victors this week.  We closed last weekΆs column with the warning that surprises do occur on WASDE reports, and such in fact did occur on the Oct 12 report release.

While almost everyone (including us) expected US production to be projected around 100K bales higher Vs Sept, the opposite was true, and, as we expected, the US export projection was enhanced to 12M bales.  However, we believed that US ending stocks would be projected around 4.5M bales, which was the lower bound for most published analysts. So the 4.3M bales prognostication, while not particularly tight, was off approximately 12% Vs the USDAΆs Sept projection.

For what itΆs worth, we still see 2016 US realized production being closer to 15.5M bales than to 16M bales.

Regarding the updated export expectation, the US is currently just above 49% committed, with net weekly sales needed to match the projection being only 142K running bales.

What few recognized prior to the report (including us) was that a backward revision to previous marketing yearΆs aggregate world consumption estimates was waiting in the wings, given the strong sales this year from ChinaΆs strategic reserve stocks.  In the end, world ending stocks for 2016/17 were projected at 87.35M bales, almost 2.5M bales lower than the previous projection.

And, while such a burdensome figure means that the world (or at least China) is swimming in cotton, the numbers are moving in the right direction.  Too, as we have seen since world carryover went well over 100M bales, distribution and quality of those stocks is a key factor.

In the whole of the report the only troubling factor for US price action seemed to be the notion that Australia has the potential to produce a bumper crop next summer.

So, just how bullish is the market?  Well, I would like to say “very”, but the Dec contract will soon enter its swan song with scheduled index fund rolling to begin the last two days of this month.  This will bring selling pressure, which could be enhanced by specs also rolling their longs into Mar.  But at this time, the price outlook seems to be constructive for the spring months, so consideration of call options may be in order.

Producers are finding the basis is predictably strong for higher quality cotton, with merchants being moderately aggressive to meet nearby shipping orders and assure their ability to satisfy quality specifications on later orders as well.

While it is too early to draw too strong a conclusion, we are hearing reports of micronaire and color issues within the mid-southern and southeastern crops.  Given that the Mid-south is traditionally a primary source for long staple middlings with premium micronaire, this could pose a problem for merchants with cotton forward contracted in these regions.

With the market moving into the lower 70s, and the basis at attractive levels, we think this is a fine time to sell recaps as they come in. If either the basis or the market breaks to less attractive levels, itΆs still early enough to compile larger recaps and tempt buyers with volume.

For next week, the standard technical analysis for and money flow into the Dec contract is supportive to bullish, but the market will likely also encounter nearby resistance.  US net export sales for the week ending Oct 13 seem likely to at least meet the weekly pace required to match the USDAΆs revised 2016/17 export target.