The old crop bull market continued to forge ahead amid extremely volatile trading conditions this week. The front month picked up 43 points while trading a 751 point range. The results were on par with the conditional prediction we made last week.
At sustained prices above the 90.00 level no significant rationing of demand has been accomplished. There are those who will argue that this weekΆs US cotton export report was unimpressive, but this is simply not the case. The US requires approximately 1.5M – 1.8M bales of ending stocks in order to service its domestic mills and captive markets from the period Aug 1 until the new crop can begin being delivered – if everything goes as planned, unlike last year.
Such an ending stocks estimate would be “bare bones” with hardly a bale to spare, and this is why it does not occur; the market rationing mechanism will force either the cancellation or rolling of some sales.
Officially, the US ending stocks estimate is 2.8M bales, but the inferred estimate is now just below 2.5M bales, which is over 100K bales less than the final estimate for the bull market of 2010/11. Hence, any report that at least meets the weekly requirements of net sales and shipments (currently approximately 47K and 195K RBs, respectively) is adding pressure to the US balance sheet and encouraging the market higher.
In one light it is difficult to imagine the final US ending stocks figure lower than 2010/11′s 2.6M, but, in another light one could see just how it might come to pass.
One result of the lessons learned from that year is that merchants are more cautious regarding sales during such markets. Too, we see no impending severe loss of demand as a result of impossibly high raw cotton prices. Hence, the overall market is more stable than in 2010/11 and could perhaps negotiate final US ending stocks to near 2.5M bales. WeΆll see.
Despite this bullishness, the front month crashed from a high this week of 97.35, plunging nearly 700 points during a short span (nearly 300 points in less than 1 minute). There are some issues with pushing May 14 much higher than this weekΆs high value in that funds will begin rolling longs to July very soon; in fact the Rogers Index Fund roll has already commenced.
And, with the May 14 – Dec 14 narrowing, we would expect mills with on-call commitments against May to roll a large portion of these sales forward to July. Hence, there is less urgency with respect to the fixing of on-call sales.
But the bullishness will likely not fade into the sunset.
If a significant portion of on-call sales against May are rolled to July, the net effect will only be to strengthen market support, as mill rolling through an inversion that even resembles the current July14 – Dec 14 spread looks, at least to us, to be cost prohibitive.
And, if the market insists via continued steady positive sales and a robust shipment pace that 2.4M – 2.5M bales of US ending stocks is doable, July 14 has a very bullish look.
If, however, the market decides that demand must be more severely rationed, such is likely to occur against the July contract and the result is likely the same, at least.
The former of these cases is very supportive of Dec 14 while the latter is less so.
Looking forward to next week, USDA will release its annual Prospective Plantings report on Monday, Mar 30. At this time we agree, directionally at least, with Informa Economics. Informa has projected a reduction of US prospective planted acreage to cotton (ELS and upland, combined) to 10.995M; our analysis has yielded an estimate of 11.08M. Current droughty conditions in California, and especially west Texas, historic seasonality and strength in old crop futures will likely be supportive of Dec 14.
For the front month, we will make another conditional prediction: if net sales and shipments on the US export report are north of near 50K and 225K RBs, respectively, we will call for near unchanged to higher; flat net sales will probably result in unchanged to a mild pullback while a large negative report could cause a retracement of 200-plus points. We expect the export report to resemble the most recent one, given that the VWAP is only slightly higher over the assay period and intra-day low values actually dipped below 90.00.
We expect the market to trade a range of 91.00 – 97.25 on the inside or 90.00 – 98.25 on the outside.
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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.
