The Dec contract gave up 50 points this week, settling at 60.14. Dec tried higher each day this week, but could not post a settlement above 61.20 – the bottom of the former long-standing trading range. Not even an Atlantic hurricane and a deluge across the eastern seaboard could scare our market higher.
This weekΆs news and events seemed to be more bearish than bovine. Mills in India continue to report shrinking margins for yarn sales; China has announced that new import quota for cotton will be limited to only that required per its WTO agreement and US export sales (while continuing to improve week-on-week) continue to fall well short of the weekly pace required to meet the USDAΆs 10.2M bale export target. Technically, the picture was no better this week with the Dec contract failing to find either significant short covering or fresh buying above the 61.20 – 61.50 area.
In fact, positive news for cotton this week was almost entirely intertwined with the weather market – cooling temperatures across The Belt, rain in the mid-southern and southeastern states and the possibility of a category 4 Atlantic storm assaulting southeastern US cotton fields. Each of the aforementioned items is detrimental to the US producer and thus bears a significant downside along with its potential market supporting properties.
The Oct WASDE report is slated for release at 12:00 PM EST on Friday, Oct 9. Although it is a bit early to have accomplished a complete analysis just yet, I do expect that the US crop can tighten with respect to production, but 3M bales is most likely the lower bound for US ending stocks at this point of the season. Too, given the slow pace of US export sales, the USDA could make a case for reducing its export projection, which is something that will almost certainly occur should the US crop be projected lower vs Sept. World production estimates are unlikely to change a great deal this month, but the projection for aggregate world consumption, should it move significantly, will likely be pegged lower vs Sept.
The take home is that a supportive report likely focuses on a debit to US production without a significant associated downgrade to the US export projection. In order for the market to shrug off its bearish attitude, participants must become sold on the notion of significantly lower US supply. And we think that this can occur.
For next week, the standard technical analysis for and money flow into the Dec contract are bearish, but the market remains technically oversold. Export sales could again show improvement, but a large increase seems unlikely. Historically, seasonality is not normally the friend of the producer at this time of year. On the whole, without the US export and WASDE reports sporting supportive to bullish data next week the market will likely need to delve to a level to which mills are unable to resist cotton – especially stocks from the US.
The consensus among the growers, brokers and merchants we have spoken to is that there is no incentive to forward contract cotton for buyer or seller with slow nearby demand and more spot cotton coming into the pipeline each day. What little cotton is trading is at a historically strong basis (essentially even futures for base qualities and several hundred points on for premium qualities). Our advice is to take advantage of this basis if your early cotton is higher quality, and use the option pit if you harbor bullish ideas for 2016.
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
