The ICE May contract gave back 70 points this week, despite a blockbuster US export report and a supportive updated domestic balance sheet, settling at 77.29. Dec futures picked up 35 points on the week with the July – Dec spread (straddle) finishing the week at a 308 point inversion. The nearby May – July spread weakened to 108 points, but remains at less than full carry.
Export data for the week ending Mar 2 was outstanding, to which we have recently become accustomed to. Total net sales and shipments against the current marketing year were approximately 263K and 544K running bales (MY high) respectively. Additionally, almost 220K running bales were logged against 2017/18! Sales for the period were accomplished at a volume weighted average price of around 77.20 despite the US currency trading in excess of 1% higher over the most recent sales period!
In its Mar WASDE report the USDA cut projected domestic ending stocks 300K bales to 4.5M despite an unexpected 270K bale enhancement to its production estimate, which now stands at 17.23M. In its latest report the USDA suggested that no further production revisions would be forthcoming until May.
The adjustment to the US production estimate in Mar is uncharacteristic, particularly when ginning continues – and may continue through early- to mid-April. The USDA’s latest classing data shows only a shade over 17M bales (480s) have thus far been classed; Mar 1 ginning figures also are at 17M bales. The final (annual) cotton ginning report will be released next month.
We have had a range of expectation for final 2016 domestic harvest of 17.1M – 17.3M bales but, given the most recent classing data, we wonder if the USDA did not overshoot the mark just a bit.
Internationally, China offloaded nearly 100% of the approximate 690K bales made available for sale this week. Such attests to relatively strong demand, although mills within China were reportedly not well covered for nearby needs ahead of the commencement of this yearΆs auction. Prices moved lower at the auction each day of the week, which seems to affirm quality concerns surrounding the auction, and could be positive for US export business.
Producers could be forgiven if they were to become blasé about the Dec contract. While 100+ point moves are fairly common in the front months, Dec has spent the past month in a two cent range with daily moves typically in the 20-40 point range. The basis has been fairly consistent as well. Nearly every major merchant is offering a similar forward contract within a 25 point range, and nearly every marketing guru is offering the same recommendation to price ¼ to 1/3 of their new crop at current prices.
On top of all that, Joe NicosiaΆs recent talk (2017 Farm and Gin Show) touting 80 cent cotton has inspired coffee shops across the cotton belt with bullish enthusiasm.
It would be a good idea, though, to temper some of that bullish confidence with a realistic projection for likely highs and lows for the Dec contract. We wouldnΆt be going out on too much of a limb to suggest a 65 to 83 range for the Dec contract, with the caveat that any run over 80 cents should be short lived and tied to some weather or political event. On the low side, itΆs pretty easy to make the case that a favorable spring and summer, combined with trade tensions in Asia could easily push the market into the mid 60s for a longer period of time.Ά
So weΆll stick with our advice to price ¼ to 1/3 of expected production in the 75 cent range, and to bring that percentage up to ½ if Dec should trade at 78 cents prior to planting. Our crystal ball gets a little cloudy after that, so weΆll revisit the strategy when we know more about how the planting season is progressing.
For next week, the standard weekly technical analysis for and money flow into the May contract remain bullish. The next major report release will be the USDAΆs annual Planting Intentions Report, scheduled for release on Mar 31.
It certainly seems that the old crop futures uptrend is not likely to fall apart over the near-term.
Have a great weekend!
