The ICE cotton contracts took another hit this week, with Dec ultimately giving up 110 points and settling at 66.98. The Dec – Mar spread weakened further, settling at 64 points of carry.
The bulk of cotton news this week (at least from our perspective) was not at all bearish. Most likely, it was the timing surrounding current and upcoming events over the near-term (and the recent increase in value of US currency) that allowed weakness to pervade our market over the last three days.
US export sales rebounded nicely for the week ending Sept 29 Vs the one ending Sept 22 and rains are certain to slow harvest progress across the eastern seaboard this week. Rain and showers will also likely hinder harvest efforts across portions of TX, OK and KS. Also, while little mention is made of it currently, the US weather map suggests that showers across the northern Mississippi River Delta are a distinct possibility in the near future.
Although it certainly seems that Matthew will not deal a knockout blow to this seasonΆs US southeastern crop, itΆs fair to say that no one has ever heard a cotton producer give thanks for October rains, much less a hurricane.
Internationally, tensions between Pakistan and India that presumably were born out of a trade status disagreement have reportedly halted the $822M annual trade of cotton between the often less than friendly neighbors. One commentator from India opined that war is a distinct possibility. The two nations have already sparred on three separate occasions since each of the nations gained their sovereignty.
Financial markets – particularly Ag commodities – do not like international unrest. And, both Pakistan and India are military nuclear powers.
Traders may also have been wary regarding ChinaΆs return to cotton trading following its annual Golden Week celebration. The return of activity in China could add further volatility to our market over the near-term.
Traders are also wont to keep much of their powder dry ahead of impending USDA WASDE report releases, the next of which is scheduled for release on Wed, Oct 12 at 12:00 PM, ET. Preliminary indications are for average expectations of only small changes Vs Sept.
While we are in the camp that expects US production to be estimated slightly higher Vs the Sept (USDA can only make minor adjustments for weather events post the end of the month preceding each new release) we think that the USDA could very well bump its export projection up a notch. The US is, after all, nearly 50% committed against the current 11.5M bale projection.
However, the increased yields noted to date this season have to be tempered somewhat with quality concerns, however. Between the rushed harvesting in the Carolinas ahead of Matthew, rains on open cotton in Georgia, and slightly higher than ideal micronaire in early classing in the north Delta, the ready availability of higher quality is worth watching.
Given the percentage of this yearΆs crop that is forward contracted, some merchants may find themselves owning a larger than anticipated inventory of cotton with color or micronaire issues.
We continue to recommend that producers sell higher quality recaps on a strong basis or on any rally over 70 cents, with the caveat that this WednesdayΆs report could potentially be a market mover. If you are bullish, you might consider selling recaps on call by Tuesday, while bears would be best served by simply taking the best available price. As always, your local buyer is a good source for perspective.
For next week, the standard technical analysis for the Dec contract is effectively neutral while money flow remains supportive. Further, we expect nearby US export sales to continue to exceed the weekly pace required to match the USDAΆs export projection.
We also expect that heavy mill on-call commitments will likely continue to support Dec (especially given the current market positions of both the trade and the specs) on dips below 67.00. Sales fixations and export sales have certainly been accomplished at price levels much higher than the ones at which our market spent its last two trading days.
Still, surprises do occur on WASDE reports from time to time and, when the market and trade consensus is tightly clustered (as they are now) deviations can incite notable volatility.
