December cotton gave up 239 points this week while trading an expanded range just above 400 points. The bottom, so far, came today at 64.53 – 3 points above where we expected it could fall, although we take little pleasure in being correct in the analysis. Dec is off over 1800 points in the last 11 weeks.
We, along with nearly everyone else, expected that new crop export sales would be strong for the week ending July 17 – and they were at just above 370K RBs. However, shipments were poor at approximately 70K RBs (I may owe the USDA that apology shortly). The crux was that at 20K RB, or so, the jump in sales was not commensurate with the 200 point volume weighted average price discount vs the previous sales period. Also, while China bought US new crop, there was no reflection that US cotton is irresistible to the worldΆs largest cotton producer, consumer and exporter ahead of expected official announcements concerning reserve policy going forward.
A lone bright spot can be elucidated from the report in that when rolling current MY sales likely to not be shipped before July 31, the US is nearly 40% committed against the USDAΆs 10.3M bales export projection.
Per our discussion here last week, it is supply that gives this market such a bearish flavor. World spot prices have slowed a bit in their current trend southward, but they show no immediate signs of charging northward. Further, current weather and crop conditions show no imminent threat to either US or world supply.
Finally, all of this bearishness in cotton is accentuated by strong bearishness in outside markets.
For next week, market fundamentals are not encouraging. The US export report will likely be strong, but a massive number of net new crop sales will likely be required to move this market significantly northward. Additionally, the aggregate speculative community is shorter for the net futures only position and much longer on the combined futures and options. This says, we believe, that speculators expect the market to move further southward over the near term.
Technically, the market remains much oversold on a weekly basis; money flow indicators are likewise oversold. Our proprietary analyses suggest that similar market structures have an approximate 3 in 5 chance of closing lower, but often near unchanged W/W, while experiencing similar volatility levels.
We expect Dec to trade a range of 63.00 – 67.75 on the inside or 62.00 – 69.00 on the outside. We estimated two week ago, post the July WASDE release, that cotton could plunge to the 60.00 level, and we think that this level is certainly still in play.
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
