ICE Dec cotton gave up 24 points on the week, finishing its second consecutive week at or near unchanged. The Dec – Mar spread remains near flat.
The market could not shake its funk through the first three days of this week. Although the market did not constantly fall throughout the period, it did, however, manage to make multiple fresh intraday lows and daily settlements over the period for the recent move lower.
The only explanation that I could offer, other than the very dismal states of cotton’s sister grain markets, was a spec net long futures position that has remained relatively heavy despite evidence of liquidation all along the crash from just below 78.00. The trade held a consensus opinion that fundamentally, Dec cotton should have been trading near 68.00 – 70.00. After all, the fundamental picture for cotton, while not stellar, is much improved Vs nearly any time within the last two years.
But this is just on the surface. A closer look at the world and domestic numbers continues to suggest that US ending stocks will tighten from their current USDA-projected level.
With respect to domestic production, there is most certainly more risk of US production falling significantly below the USDAΆs current 15.9M bale estimate than rising significantly above it. There is little doubt that the recent rains across West Texas – particularly non-irrigated areas south of Lubbock – have been most beneficial.
However, the Upper Coast and lower Blacklands regions have suffered both yield and quality losses from recent heavy rains and flooding and final harvesting operations within the Rio Grande Valley have been delayed.
In the Mississippi River Delta, private yield estimates from the southern portion of the region are moving lower as a result of boll rot and other disease pressure, hard locking of bolls and heavy pest infestations.
In the northern Delta it is unclear how much disease pressure, especially target spot, will reduce ultimate production potential, and our friends in Missouri continue to question both the USDAΆs current acreage and yield estimates.
Still, overall, my latest straw poll returned expectations for strong yields this fall, although producers say this seasonΆs harvest will get into full swing a bit later than normal.
Across the southeastern states, pockets of drought have endured the growing season, with several counties having already been declared federal disaster areas. HermineΆs slamming ashore with 80 mph winds is not the preferred drought-busting cure. Note that any rains from this point forward (and there will likely be some with the tropical season winding up) will largely be unwanted.
On the plus side for US production, domestic abandonment should be relatively low (barring significant hurricane events).
Internationally, production estimates from within India and China – among other areas – continue to move below current USDA-projected levels while demand estimates seem to remain relatively static, with a small upward bias.
On the whole, it seems to us that an eventual US carryout near 3.0 – 3.5M bales for 2016/17 is plausible. And this weekΆs US export report seems to support our theory with nearly 326K running bales of net sales against 2016/17 and almost 50K against 2017/18.
Shipments remains strong, as well, with the US needing to average less than 140K and 215K running bales of net sales and shipments, respectively, per week in order to match the USDAΆs 11.5M bale export target.
With harvest imminent in most of the cotton belt and prices in the 60s, merchants have little incentive to get aggressive with their forward contracting options in the next few weeks. That said, we continue to hear from producers who have contracted or fixed less than half their crop.
While the potential exists for a rally to the upper 70s, and the likelihood of a very strong basis for long staple middling is nearly certain, we continue to recommend pricing at least ½ of your estimated production against any rally into the low-mid 70s.
On the other hand, producers who have priced the majority of their crop can spend the next several weeks trying to time their defoliation right and harvesting the highest quality crop possible.
For next week, the standard weekly technical analysis for the Dec contract is now effectively neutral while money flow remains supportive. Export sales for the week ending Aug 31 could once again prove quite strong.
Have a great holiday!
