The bulls held their own through Thursday, but on Friday they either ran out of steam or just simply threw in the towel. The July and Dec contracts finished the week with losses of 110 and 50 points, respectively. The July – Dec inversion weakened, but remains heavily inverted at 365 points.
US export sales and shipments have slowed over recent weeks, but not nearly so much that the USDA’s 14M bale export projection is in jeopardy. It seems that the July – Dec inversion continues to drive fresh sales and deliveries to mills, with the current easing of business being primarily a product of the lack of US cotton available for prompt or medium-term delivery and perhaps some demand rationing. The current scenario is seasonal and is to be expected.
Export data for the week ending April 28 continued to suggest that the 14.5M bale mark remains a potential upside target.
It is WASDE time once again, with the USDAΆs May report release slated for Wednesday, May 10 at 12:00 PM sharp, on the eastern quarter of the country. The “sharp” part mostly comes true, or maybe I just need to synchronize my watch with the USDA clock. At any rate, that is the most predictable aspect of the report.
The May report will feature the USDAΆs first official balance sheet for the 2017/18 marketing year, and many figures are likely to closely resemble those put forth at the annual Agricultural Outlook forum in Feb. WeΆll be paying particular attention to the domestic production projection, which has potential this year to show the largest deviation from those early prognostications.
At press time Friday, our supply and demand balance sheet is still a work in progress. That said, it certainly seems that estimates of aggregate world production and consumption and the level of world trade should closely resemble those put forth in April. And rightly so; 2016/17 will be history before too much more time elapses.
For all that, the advent of the 2017/18 balance sheet and rolling off of the 2013/14 marketing year from the active ledger does proffer potential for revisions within the USDAΆs database. Often termed “backward revisions”, these adjustments are inherently difficult to predict and even more troublesome to time.
The domestic balance sheet, however, seems likely to change significantly Vs the report published in April.
While we are not sold on the notion of the USDA enhancing its 2016/17 export estimate on the May WASDE report just yet, we do foresee C/O tightening per a decrease in the US production estimate to around 17M bales. This alone could take estimated domestic ending stocks to 3.5M bales or a bit less. The variance, in our opinion, lies within the prospects for an export estimate enhancement in either the June or July reports and the potential for a modest reduction in the USDAΆs domestic consumption valuation during the same time span. However, either, neither or both of these adjustments could be put forth within the May balance sheet.
As of April 30, US cotton plantings are 14% complete compared to a 5-year average of 17% and 2016 progress of 15%. Our recent surveys indicate that this weekΆs USDA progress report will show sowings have since fallen even further behind the average pace, thanks to unseasonably cool temperatures and wet weather across the bulk of The Belt. The lack of planting progress to date may prove to be a blessing in disguise for many growers as this past weekΆs weather was not ideal for either emergence or early season vegetative development.
At this time, the bright spot appears to be southeastern Alabama and Georgia where planting progress is on schedule. Heading into the second week of May, there is plenty of time on the calendar to get cottonseed in the ground, but warmer temperatures and sunshine would inspire optimism for many producers.
On the political front, US cotton producers are justifiably nervous about two developments. On the international front, TurkeyΆs threat to take military action against US troops in Syria is not only a step closer to direct conflict with Russia in a global hot spot, but it signals a substantial cooling in relations with a major customer for US cotton (among other commodities). Combined with the continuing drama in North Korea and tensions between the US and China, there is more than enough fodder for nervousness and uncertainty in world markets.
On the domestic front, cotton was torpedoed by Senators Stabenow and Leahy at the 11th hour when a much anticipated provision to allow cottonseed into the farm program was taken out of the spending bill. The aforementioned senators proposed to pay for enhancements to the dairy program by cutting cotton payments, effectively turning the two commodities against each other and undoing 2+ years of negotiations and hard work by the National Cotton Council and others. All eyes now turn to newly confirmed Secretary of Agriculture Sonny Purdue and hopes that he can do administratively what his predecessor refused to do. Read more: Nat. Cotton Council Furious with Politicians Blocking Cottonseed Deal – DTN
For next week, the standard weekly technical analysis for and money flow into the July contract remain bullish, with the market no longer in technically overbought condition. But it is the WASDE (and the weekly US export report) that market participants will be most intently focused on next week. Given weather across The Belt this week, most traders will also closely peruse MondayΆs weekly crop progress report.
If 2016/17 US ending stocks are estimated below 3.5M bales in the May balance sheet, the combination of such with the heavy mill on-call position could cause the July contract to spike – likely taking Dec along for the ride. However, we would expect any rally to be met with producer selling on Dec and spec liquidation on the July contract. After the fireworks (if any) are over, the market will likely refocus on weather conditions as producers put seed into the ground.
Finally, a point to ponder with many producers considering the marketing of the 2017 crop: it has been said too many times that “the specs have more money than the trade does cotton…”. It only takes a bit of arithmetic to see that this is inherently true. It has become an axiom akin to the American producer being relegated to being a price-taker, with no single or small group of producers sufficiently able to influence the market via their own hand(s). Since the spec sector tends to hold net long futures positions, they are not the enemy of the farmer; it only seems so when they decide to book profits before the farmer is ready to price his cash cotton, or other crops.
Hence, taking some time to understand the mechanics with which the speculative community injects and withdraws cash from our markets is a worthwhile task. It is far less frustrating to walk away from the market with a little less cash in hand while still standing in profit territory than it is to sit and hope for better fortune. It is not possible to wish the market higher.
Las Vegas, Atlantic City, Tunica and the like, if not built on, have thrived on hope.
Have a great weekend!
