The bears got to scratch another mark in the “W” column this week with the July and Dec contracts giving up 236 and 66 points, respectively.  The July – Dec straddle remains significantly inverted at 430 points of negative carry, although it is well off its May 15 close of 1026.  

By virtue of having the greatest open interest Dec is – and has been for about a week – the de facto lead month.  However, we have continued to focus most of our daily analyses on the July contract as it continues to exhibit greater trading volume and volatility.

We do not remember the lead open interest having ever switched so early – a look at historic data might well show that it never has.  But that is a task for another day.

However, we suspect that spec profit-taking, the increase of ICE certificated stocks to nearly 425K bales and the recent explosion (and subsequent retracement) in the July – Dec straddle all contributed significantly to making Dec the lead month.  One can readily see how specs might want to play the safer (seemingly, for now at least) new crop contract Vs the aforementioned perils associated with July.

Demand for US bales remains relatively strong against old crop supplies and outstanding against the new crop, with around 2.75M running bales already committed against the latter.  Very large old crop sales cancellations have yet to emerge; the 110K or so cancelled over the last two reporting periods is, in our opinion, nothing to be alarmed about given July’s explosion over the periods.

On the production side, growers across the US have made tremendous planting progress over the past two weeks, and we now estimate planting of the 2017 crop at around 75% complete.  Planters will continue rolling across parts of TX up until June 10 while most operations in the Midsouth and the southeastern states are either complete or nearing completion.

After surveying sowing progress and crop conditions across the cotton producing regions of the US, we have concluded that the 2017 crop is a mixed bag with respect to both parameters.  While many parts of TX have been blessed with ample moisture, patches of droughty conditions remain with reports of seeding on non-irrigated acreage being “dusted in”.

Seedling development across the Midsouth ranges from pinhead square to just now emerging.  We now expect some intended cotton acreage to be lost to soybeans across the northern one half of the Midsouth. Recent rains across AL and GA were beneficial in easing droughty conditions while the Carolinas and VA could reportedly do with more seasonal cotton weather.

On the whole, we estimate that this yearΆs crop is off to an average start, at best.

Over the past week, we have had the opportunity to meet with many of the industryΆs best minds at meetings of the Memphis Cotton Exchange and the American Cotton Shippers Association. Producers can take solace in knowing that there is some consensus that the fireworks in the July contract arenΆt over, and that the potential for Dec to make one more run to or above 75 before July goes off the board still exists.

That said, there are a huge number of fixation orders at and above 75 cents, and progress beyond that point will be slow going. There is also a broad consensus that the potential exists for Dec to trade back to the 60s once the July contract is off the board.

As one well-placed buyer put it, “Dec has 2 to 4 cents in upside potential, and 10 cents to the downside.  Producers should include that math in their risk analysis moving forward.” We concur, and think it makes sense to price Dec cotton through puts or forward contracts on any move near or to 75 cents. As we get closer to first notice day on the July contract, that level could drop.

For next week, the standard weekly technical analysis for the July contract is bearish, with money flow heading southward, as well.  However, July is significantly oversold on a weekly basis and extremely oversold on a daily basis.  Hence, it certainly looks as if we are due for a bounce.

Scheduled index fund rolling will commence on Tuesday with the Rogers roll, and we would expect any dips to be met with short covering associated with mills fixing their remaining on-call commitments (which are considerable) against July.

Have a great – and safe – holiday weekend!