Demand for US cotton remains strong. Over the past 7 weeks the US has logged 1.81M bales of export sales and total commitments against the current MY now stand at nearly 46% of the USDAΆs 10.7M bale export target. Shipments were not robust over the assay period, but US cotton stocks are tight; total net sales were off a bit W/W, but this was largely expected.
US economic data released this week was, overall, supportive of downstream value added demand. However, such positive news tends to support the value of US currency, and this often applies drag to would-be rallies in our market. This is particularly true for cotton, as the US depends on strong export demand.
The USDAΆs latest projection of US production for this season, at 17.5M bales, continues to come under scrutiny from varying factions and it is the subject of many market reports. Hot and dry weather conditions over most cotton producing regions of the US are lamented by many within the US industry.
While it is true that more precipitation during August would have likely have been very beneficial, scattered showers have occurred over stressed areas over the last week. This is particularly true for W TX over recent days; the rains have not been general and generous accumulations have been localized, but the US crop is likely not so stressed as to realize a large increase in abandonment this season vs what has already been projected.
The Cotton Association of India projected this seasonΆs total Indian production at 6.74M MTs, nearly 31M bales and 2M bales more than the USDAΆs most recent projection. Weather in China continues to raise concerns over southern producing regions. At this time in Brazil, new crop production is much more entwined with the cash price of cotton and its relationship with the cash price of soybeans.
Looking forward, there continue to be supportive factors for this market. At current price levels, demand for new crop US cotton will likely remain strong. Uncertainty concerning the US crop, as well as the very real possibility of further reductions to new crop production in both Australia and Brazil could also support Dec futures. And there is no doubt that current US stocks are tight and the Dec – Mar spread behaved accordingly this week.
On the negative side:
US currency continues to exhibit strength, which will likely apply some drag to export sales.
In China, harvest of high-quality cotton in Xinjiang is expected to begin late this month, which could curb nearby demand for US cotton by China.
And this seasonΆs US crop is largely uncommitted, hence strong selling pressure likely lurks overhead as the harvest season approaches.
Going forward, weather premiums will very soon move away from hot and dry conditions and become linked to the likelihood of wet and cool (or cold) conditions and the ever-present autumn threat to cotton crops near US coastal areas. These latter concerns can certainly spike the market more quickly that an encroaching drought during the summer months, but on average market volatility normally begins a descent in late August.
Further, for the week ending Aug 19, the aggregate speculative sector increased their net short position slightly. As the data apply to the Dec contract, the aggregate speculative sector continued to be somewhat bearish for the period in question. Further, speculators continue to be considerable sellers of volatility, which suggests that smart money expects this market to remain relatively range bound for the near-term, at least.
The overall technical analysis remains bearish, with some of the marketΆs weekly oversold condition weakened. Money flow indicators, however, remain much oversold. Our proprietary analyses suggest that similar market structures have a slightly greater chance than even of closing lower, but often near unchanged W/W, while normally experiencing an increased level of volatility.
Directionally, weΆll call it near unchanged to somewhat lower for next week while trading a range of 63.30 – 67.00 on the inside or 62.00 – 68.00 on the outside.
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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
