It was an interesting week in trading ICE futures, specifically Dec 13, even if the statistics do not bear it out. A glance at the weekly figures shows that Dec traded within a subdued 224 point range (82.91 – 85.15), the upper portion of that range being realized on Friday before the market plummeted during the settlement minute and the post-settlement period by nearly 50 points.

We are currently blaming this on the stark lack of volume that was traded on Friday rather than speculators having second thoughts about a WASDE report that was seemingly bearish. Dec 13 found its low for the week on Monday and finished its week in the upper quarter of its trading range, which we think is positive despite FridayΆs settlement action.

The market also saw Dec 13 and aggregate open interest (OI) drastically decrease its rate of decline since the recent market collapse, and then watched as OI slowly began to inch northward over the last two days. We also see this as a bit encouraging.

The interesting part of trading action, at least from our vantage point, were the various reports that were released, the surprise (or lack thereof) of their contents and, most of all, the manner in which the market reacted to the knowledge that they contained.

We expect that the USDA-NASS weekly crop progress report was of little surprise to many; basically it showed slightly improved or flat conditions in most areas except TX and OK. However, with the weight that TX acres bear on US production, the improvements were not enough to increase the Dow Jones Cotton Crop Condition Index, which came in at 91 for the second straight week.

The weekly report on traderΆs commitments was also of little surprise as it simply quantified the vast reduction in large speculative long positions since the market peaked above 93.00. The weekly export report, however, was a bit of a surprise.

The report contained net sales figures of approximately 150K running bales (154K US 480s) when considering both upland and ELS types of cotton, which was less than the previous week by nearly 30K bales. The surprise is by virtue of the sub-84.00 level to which prices dipped during the sale period; the trade had expected similar net sales figures to the previous report – give or take.

Positive items in the report were:

The very small number of cancellations for the week (approximately 2K).

ChinaΆs formidable participation and the purchasing activity of other top cotton-spinning Asian entities.

The market interpreted the report as supportive despite the net sales numbers coming in just under their expectation. The WASDE report for cotton contained numbers that were very unfriendly, to our thinking.

We had expected a reduction in China production, as had most other analysts around the globe, but the USDA did not call it that way, opting to leave their China balance sheet largely unchanged. At the world aggregate level, via consumption reductions, production net increases and changes in world trade, the USDA projection of 2013/14 carry-out now stands at a record 94.73M bales.

early all of the increase was outside of China, which we thought added to the reports bearish flavor. USDA-NASS estimated less production (12.9M bales) on 140K and 80K more planted and harvested acres, respectively, within the US.

In the end, via increased 2013/14 carry-in and reduced exports the USDA raised the US carry-out projection 100K bales to 2.9M. In retrospect it seems as if speculators discounted this report heavily, most likely due to production concerns in China and the US as well as to USDA-reduced consumption, which most analysts expected to see increase slightly.

Another note on US production continues to be USDA-RMA crop insurance data, which is updated regularly with respect to losses as they are filed and processed.

Last year the loss ratio for Texas upland (indemnity divided by premium) was approximately 1.72 (a 72% underwriting loss, insurance subsidies and reinsurance terms notwithstanding), two weeks ago it stood at 1.02 for the year and now is at 1.17 with harvest in the most questionable areas yet to come.

The CFCT also released on-call sales numbers that were off approximately 10% and 2% for Dec 13 and all contracts in aggregate. Normally, we would see this as a bit bearish for the coming week. Instead, we view this as neutral to somewhat positive. The gross number of contracts yet to be fixed against Dec 13 is far greater than it was at this time last year. Also, the reduction can be easily attributed to fixations after the recent rally above the 90.00 mark.

Looking ahead to next week we expect the weekly crop progress report to show continued improvement within the southeastern states and some further decline in Texas and Oklahoma. We think the trade expects this, as well.

This may be the last report that bears much weight as mid-September is upon us and the pressing concern becomes harvest progress. We further expect reduced net sales on the weekly export report, but probably not by a lot.

Traders will most likely be paying close attention to cancellations, destination (and destination changes) and the weekly pace with respect to the USDA export target for this MY.

Outside of this, it should be a quiet report week, which means Dec 13 can be heavily influenced by other agricultural markets, equity markets and macroeconomic news and its effect on US and other world currencies (especially India and Brazil).

But, it seems less likely each day that the US will engage in any military action against Syria, which we think can only be positive for the cotton market as speculators may become more willing to wade in and help Dec 13 close those looming gaps overhead at 88.65 – 88.86 and 92.61 – 92.93. For producers, we hope that this is so.

Overall, our analyses indicate a flat to slight improvement again by next FridayΆs settlement, when viewed in light of the considerable support recently found in the 82.00 – 83.00 level. Barring any fresh, negative news being made known to the market we would expect any major move to be in the positive direction.

Louis W. Rose IV, PhD, MBA, grew up on a cotton farm in northeast Arkansas and has been involved in cotton his entire life – starting in his familyΆs fields, then as an Extension scout while attending the University of Arkansas and later as a crop consultant, operating his own firm before transitioning into a career as an agricultural analyst in 2000. He is a former Global Cotton Analyst with Cargill Cotton where he developed predictive statistical models for the firm. Rose currently provides analytical services. Contact: info@rosereport.com.