Rose on Cotton: Prices Just Keep on Coming Down

Rose on Cotton: Prices Just Keep on Coming Down

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Dec picked up 94 points this week to settle at 64.21 while trading a very slim 181 point range over the last 5 days. We had expected near unchanged to a bit lower on the week; our accuracy, I suppose, depends upon oneΆs own definition of “near unchanged”.

Dec corn was near unchanged W/W, while CME wheat slipped a bit. Nov soybeans made a respectable weekly gain on weather premium during this crucial pod-setting period and on strong export demand for new crop, which is partially the result of the current strong Brazilian export basis.

Export sales for the week ending July 31 were strong at approximately 250K RBs, which nearly matched last weekΆs sales figure. Total exports for 2014/15 summed to nearly exactly the USDAΆs projection of 10.5M bales.

I now officially owe the USDA cotton analysts an apology; they called it more accurately from longer distance than did I.

Still, in excess of 500K RBs of old crop sales were rolled to the current MY and total commitments against 2014/15 now stand at approximately 42% of the USDAΆs new crop export target of 10.3M bales. Additionally, strong export sales are likely to continue for the period ending Aug 7 with the volume weighted average price and average low price each at nearly 100 point discounts vs the sales period reported upon this week.

We suspect that a recent lack of strong shipments in the face of dwindling certificated stocks means that domestic mills were poorly covered.

The US has logged approximately 1.5M bales of new crop sales over the last 5 weeks. Neither this nor the progress toward this MYΆs export target are bearish figures. Further, China currently accounts for approximately 17% of US new crop sales. This, too, is less than bearish.

Nonetheless, and not to sound like a broken record, it is the supply side that has allowed the bear to maul our market for over two months. It is less than profound to state that either a significant supply shortfall or constraint, or, perhaps, a bit of each, will likely be required to prompt this market significantly higher. Yet, hints of such are beginning to emerge.

Although a larger US crop projection is generally expected on the Aug 12 WASDE report vs the July release, some reputable firms are projecting US production lower by 400K, or so, bales.

Cotton Australia, a Sydney-based producer group that is of the habit of producing reliable estimates and projections, has postulated that 2014/15 production could plunge as low as 2.1M US statistical bales; such would likely mean increased demand for US bales for export. Further, there is growing sentiment that ChinaΆs crop is off the average development pace while concerns abound regarding the late sowing of this seasonΆs Indian crop. And, CNCRC projects 2015 production in China off approximately 25% Y/Y, down to near 23M bales.

Also, plunging cotton prices in Brazil, coupled with a suspected current short supply of soybeans, per export basis analysis, could very well lead producers there to move more planned cotton acreage to the second crop scheme. Such would likely result in a significant reduction in total new crop Brazilian production.

The Cotton Outlook A-Index-ICE Dec futures spread was at 938 points this morning and world prices are either near, or rapidly approaching, levels that are competitive with domestic prices in China.

Certificated stock continues to dwindle D/D and the Dec-Mar spread stubbornly remains far below full carry at < (100); increasing OI in the Mar contract further suggests increased bull spreading activity. Further, merchants will likely have difficulty sourcing cotton that they are rapidly selling at current market prices. If one cannot purchase the physical product, and if sales do not involve an optional origin disclaimer, it would be prudent to buy futures. Hence, we may be about to realize some transference of the overwhelmingly bearish sentiment regarding futures to that of merchant basis. Technically, a 5 point gap remains just south of 79.00 on the Dec chart from a couple of months back. Most chart gaps do become covered, and this does provide a glimmer of optimism as to where Dec could reach, given, of course, that the “right” conditions develop. On the negative side, world cash prices continue to trend lower across most locations, while continued strength in US currency will likely not be friendly to Dec futures. Further, speculators continued to exhibit bearish sentiment; for the week ending Aug 5 the aggregate speculative sector increased their net short futures only position by about 50% to over 12K contracts. This occurred, on average, at a typical price of just below 64.00. The specs are long futures and options combined this week, with their implied option position long, and up nearly 150% W/W. We think this conveys continued bearish sentiment, but with a bit more caution than was seen last week. Further, any formidable rallies are likely to be met with significant producer selling pressure. Additionally, USDA-RMA crop insurance data, to date, indicated over 100K acres of ELS type cotton was planted above the June 30 survey results; the data further suggests that only negligible claims have thus far been logged. Loss ratios to date stand at 15% (19.5% for TX and about 3% for the balance of the US), which suggests a rate of abandonment that is well below average, especially for TX. In total, over the near-term, at least, all of this may render Dec range bound. The USDAΆs Aug WASDE report will likely provide valuable insight on the aforementioned items. The monthly Bloomberg survey, to which we contribute, calls it at 16.9M, 10.5M and 5.4M bales for US production, exports and ending stocks and 116.7M, 111.8M and 105.6M bales for world production, consumption and ending stocks, respectively. Technically, the analysis remains bearish, but the market remains much oversold on a weekly basis; money flow indicators likewise remain oversold. Our proprietary analyses suggest that similar market structures have nearly a 3 in 5 chance of closing higher, but often near unchanged W/W, while experiencing a somewhat increased level of volatility. Direction will likely be conditioned on the WASDE report; a reduction in the currently projected US ending stocks of 5.2M bales, so long as the aggregate world numbers are not overly bearish vs expectations, could prompt the market toward expected resistance at 67.00. However, projected ending stocks near 5.5M, or more, bales will likely incite renewed selling and fresh contract lows. We expect Dec to trade a range of 63.00 – 66.00 on the inside or 61.50 – 67.00 on the outside. The Rose Report weekly edition is published and made available free of charge as a courtesy to producers, ginners, merchants, agents and all others who have an interest in the cotton market. To obtain a free trial of the more comprehensive and up-to-date Rose Report daily edition or to learn more about our other cotton analyses and analytic services please visit: http://www.rosecottonreport.com/.

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