It was a trying, frustrating, if not outright miserable week for bullish row crop investors, with ICE cotton joining the CME grains in posting weekly setbacks. CME bulls took a shellacking, while cotton optimists were punished less severely.
The ICE May contract gave back 89 points of last week’s 107 point gain, settling at 77.47. Dec futures gave up 14 points and continue to trade either side of the 75.50 mark. The July – Dec spread (straddle) finished the week at a 334 point inversion, which should lead to increased interest in selling the July – Dec spread in the not-too-distant future.
CottonΆs weekly setback seems to be largely tied to its correlation with outside markets – especially the equities. It has been argued that many entities holding diversified positions needed to trim their futures holdings to cover losses against their equity holdings.
Equity losses were reportedly sparked by delays and political challenges to the Trump administrationΆs planned tax and regulatory reforms. These concerns were exacerbated by this weekΆs failure by Republicans to garner the votes required to repeal and replace the Affordable Healthcare Act.
There was other political news this week of interest to all agricultural entities, but particularly for cotton producers. Sonny PerdueΆs confirmation for installation as the new Secretary of Agriculture is thought to be all but a lock. PerdueΆs strong ties to the cotton industry and sympathetic ag organizations should be friendly to a cotton industry that hasnΆt felt the love from Washington in recent years.
On the other hand, the Trump administrationΆs first budget blueprint proposed very deep cuts to the Department of Agriculture, and this can be viewed at somewhat less than neutral at best for cotton (and other row crop) producers.
It also remains to be seen how PerdueΆs strong pro-trade roots will work with TrumpΆs stated preference for protectionism. The debate over the Border Adjustment Tax will provide more than ample fodder for conversations between ag commodity groups and congress in the coming weeks, and a cotton-friendly Secretary of Ag could help on the policy side.
For what itΆs worth, this is by design an apolitical publication. We know that there are Democrats, Republicans and Independents among AmericaΆs food and fiber producers. Moreover we realize that there are cotton producers who hold progressive and very modern liberal political views and philosophies and we do not wish to offend either of them.
Returning to price discovery for cotton, one would tend to expect that US currency trading south of par, combined with continued strong demand for US bales should have pushed cotton higher this week.
The latter point is especially pertinent with net sales and shipments for 2016/17 of 338K and 395K running bales, respectively. Sales against 2017/18 were just above 200K running bales.
Another very supportive factor continues to be mill on-call commitments, which increased slightly across all active months and was off only around 200K bales against the May and July 2017 contracts. Approximately 7.7M bales – 3.3M bales against the May contract – remain to be fixed before the expiration of the July contract.
In the end, the potential for a bearish Prospective Plantings report (Mar 31), ICE certificated stocks of around 325K bales and next weekΆs commencement of scheduled index fund rolling was more than enough to cause a significant number of spec bulls to either exit or proceed with caution this week.
With respect to competition for acreage, CME corn and soybeans seem to be in a race to see which one can discourage the most planted area in 2017. In most areas, cotton acreage will likely increase at the expense of the two CME staples.
However, we are told that strong peanut contracts across the southeastern US (particularly Georgia) will hold acreage committed to cotton in 2017 to a minimal increase. Recent infrastructure investment for peanut production and processing within the northern Mississippi River Delta could sway a few acres in our neck of the woods as well, but the end result should be negligible with respect to curbing cotton acreage.
With forward contracts still trading in the same range as last week, we continue to advise producers to price ¼ to ½ their estimated yield through contracting, puts, or insurance. The Dec contract has upward potential, but the downside risk could be substantial if the world produces a large, high quality crop, particularly if trade disputes and tariffs become a larger issue during the next several months.
For next week, the standard weekly technical analysis for and money flow into the May contract remain bullish. A number in excess of 12M bales in the Prospective Planting report could be taken as a bearish sign; it most certainly will not be price supportive. On a positive note, we do not see anything yet to suggest that US export sales and shipments for the week ending Mar 24 will not again be formidable.
Have a great weekend!
