The ICE Mar contract picked up 24 points on the week as the market continued to negotiate strong demand for US cotton for export and bearish domestic and international supply side fundamental factors, settling the week at 71.04. The nearby spread remained near flat at just 28 points of carry. The old crop – new crop spread remains steeply inverted at around 200 points on July – Dec.
Despite a domestic supply scenario that is burdensome and a world S&D balance sheet that is less than friendly, with respect to the same metric, US cotton continues to fly off the shelf.
It is, of course, not at all uncommon for US cotton export sales and shipments to increase as merchants receive and organize inventory. But the US has sold in excess of 1M running bales in just 4 weeks. And, although this does not sound out of line for a 12.2M bale export projection, we must recall the extremely strong sales that occurred during the early weeks of this marketing year – the US is now 67% committed against this benchmark.
Most probably, US export sales will slow over the near- to medium-term as export shipments increase. Some analysts point to the current expected level of world stocks outside of China, which is near a medium-term average, in explaining that our market should either stay near its current level or, perhaps, move higher. In our opinion, the most supportive factor for our market remains the very heavy mill on-call position against the Mar, May and July contracts, against all contracts.
However, US ending stocks with the potential to be 5M bales, the extraordinary quality of this season’s crop, probable large production from major export competitor Australia, strong US currency value and the steep old crop/new crop futures inversion are not price positive. The latter item, we think, is likely to result in a large increase in certificated stocks over the near- to medium-term as merchants either look to build carry in the market or to off-load stocks to the board rather than store them in inventory.
Our broker friends tell us they are getting the normal seasonal volume of calls from producers trying to decide whether to sell cotton before the end of the year or hold with hopes for a spring rally. Our advice hinges on the answer to one important question: “Do you own the warehouse?”
As we have noted previously, storage, interest and opportunity cost work together to make waiting an expensive strategy, and can easily cost upwards of a penny a month. ThatΆs a steep price to pay when the potential upside is limited, and a growing consensus sees the market trading within a 2-3 cent range for the next several weeks.
The argument can be made that events will transpire on January 20th that have the potential to move the market, even if there isnΆt much of a consensus on which direction that movement might take. Whichever direction, the July/Dec spread is worth looking at, and selling said spread might be a better way to take advantage of volatility than holding cotton.
For next week, the standard weekly technical analysis for and money flow into the Mar contract remains supportive to bullish. US net export sales for the week ending Dec 15 will likely again eclipse the weekly pace required to realize the USDAΆs export target, but shipments still need to quicken. As 2016 comes to a close, some specs will likely book profits on their longs while early 2017 will likely see index fund rebalancing maneuvers that are less keen on being long cotton near 70.00 Vs levels seen at the same time in 2016.
With the market continuing to coil in a tight consolidation pattern and, given heavy spec and trade positions against the ICE contracts, a significant break from the current well defined trading range is likely not too far off. And, while such a move could very well be higher over the short-term, we still think that medium- to longer-term movement will be lower.
