ICE Mar cotton futures got off to a rocky start in 2016 amid index fund liquidation, poor economic news from China and geopolitical concerns, giving up 188 points and settling at 61.40. Dec futures gave up 177 points, settling at 62.95.
The New Year commenced with an eventful week, although the news was more bearish than not. US export sales concluding 2015 were disappointing, even for the holiday season, at a total of just above 90K running bales. Still, we look for export numbers to improve significantly as 2016 develops. Outside of Informa Economics’ slight increase of its 2015 US production estimate, most news centered on acreage estimates for the new crop.
Most estimates put US planted area to all cotton (upland + ELS) near 9.7M acres – a figure we see as likely keeping 2016/17 US ending stocks near 3M bales. At this time, we believe the market will encourage US producers to sow closer to 10.35M acres in 2016. But the market and prices relative to grains may not be the only driving factors.
Grain sorghum is not likely to fetch the premium that it did in 2015, and this likely translates to an increase in acreage, particularly in OK and TX. Too, 100 US representatives and 19 senators have signed letters urging Secretary Vilsack to invoke his power to reclassify cotton as an “other oilseed”, which would also likely translate to increased acreage across The Belt.
If such occurs, it will likely take Brazil less than two minutes to commence another round of bellyaching foul-crying. Although I am a great fan of Brazil, their generous hospitality, and their breath-taking scenery, it is a fact that the average cotton producer in Brazil is more prosperous than his US counterpart.
Given that, the WTO as it applies to cotton is somewhat lost on me. With respect to cotton, as well as nearly all other agricultural production, Brazil is only a developing economy with respect to its ability to transport its wares both domestically and for export. Regarding production, they are on par with the US and Australia.
On the international stage, dour economic news continues to pour forth from China with its stock exchange closing early twice already this year and with the central government devaluing its currency as many times in the same span.
The claim that N Korea supposedly detonated a hydrogen (fusion) nuclear device, which are potentially hundreds of times more destructive that those released on Japan, had investors reaching for Valium and Xanax, despite the likelihood of KoreaΆs claims being somewhat embellished. Saudi Arabia did its part in churning world turmoil via strained and severed diplomatic ties as a result of a round of controversial government sanctioned executions.
Next weekΆs premier event will be the Jan WASDE report. We expect US production to move a bit lower, although we are uncertain that US ending stocks will move much. World production and consumption are likely to see yet another round of projection cuts. The monthly Bloomberg survey of traders and analysts shows an average expectation for US production, exports and ending stocks of 12.98M, 9.8M and 3.18M bales, respectively, while also showing world ending stocks likely near unchanged Vs Dec.
Merchants have widened their new crop basis somewhat from the hyper aggressive basis still being seen on old crop recaps, but with forward contracts being offered within 100 points either side of the Dec 16 crop, producer basis is still substantially friendlier than the traditional 200-500 off Dec. It would be understandable if producers hearing reports of increased acres and a struggling Chinese economy were to jump at the current basis, but it bears noting that a lot can happen between January and May.
If current prices work out to a profitable price for you, it might make sense to book 10-20% of your crop, but we believe better opportunities will appear in the next 8-12 weeks.
For next week the standard weekly technical analysis for the Mar contract is somewhat bearish but the market is in both a daily and weekly oversold condition. Weekly money flow into the Mar contract is now bearish. Next weekΆs export sales are again likely to be much improved from those put forth this week. If the USDAΆs reduces its US production projection to 12.9M bales, or lower, the market is apt to move higher.
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
