As sad as we are that Dec 13 will almost certainly fade away with its best days far behind it, we are relieved that we did not allow our optimism and hope for producers still holding uncommitted or unfixed stocks to pen last weekΆs article.
Regardless of oneΆs political persuasion, we think that the last failed run to levels near 90.00 broke down due to the lack of transparency that traders are normally afforded via the USDA information pipeline.
Without the normal flow of information, the confidence of the speculative sector was pared, and so were their long positions. Of course, the situation was only exacerbated by the current bifurcated world S&D scenario. I am referring, of course, to the majority of carryout that is at the sole discretion of government officials in China, which we must consider in a very different light than the balance of carryout elsewhere in the world.
Dec 13 began the week at 79.08 and finished it at 76.58, a mere four points on its weekly low. Dec 13 has given up 1060 points since Oct 7, 1086 points since Oct 4 and 724 points over the last 11 trading days – each of these days posting a loss on the previous dayΆs settlement. A 10-day consecutive loss string had not occurred since 1979 – I was in the 6th grade and just discovering rock and roll.
In fact, Dec 13 has been a loser on 18 of the last 24 trading days. As downtrends go, this is the real deal.
Speculators have trimmed approximately 37K contracts in Dec 13 and nearly 15K in aggregate since Oct 4. Certificated stocks began to climb, day over day, which lent credence to private estimates of US new crop production much closer 14M than 13M bales (some of which have been recently raised slightly).
News and rumors of increasing production in India and increasing area sown to cotton in Brazil did not offer bulls any encouragement. Further, the weather market evaporated with the arrival of optimal harvest weather for this seasonΆs very delayed US crop. That applied significant harvest pressure to the cotton market.
Rumors from Asia abounded as to the short purchases by CNCRC for the reserve this season, presumably on quality issues, which made domestic stocks more readily available to mills in China. Hence, less need for cotton imports. Rumors of a potential CNCRC reserve release at lower price levels than expected (read: reduced or no additional import quota issuance) also weighed heavy on market sentiment.
Further, simultaneous to the initiation of the RogerΆs roll, the US dollar has surged, now trading between 80.00 and 81.00 on the index (read: “when it rains, it pours”, or “MurphyΆs Law”).
Perhaps what makes this all so troubling is that this bearishness prevailed despite a US Dollar Index trading much closer to 79.00 than 80.00 for the majority of the last 700+ points of loss and a better than expected, three-week combined catch-up report on US export sales report and official reports from China estimating their imports and domestic consumption at significantly higher levels than the latest published projections by the USDA.
The market is aware, too, that the USDA is likely to lower its projection of China new crop production by at least 1M, if not much closer to 2M bales.
On a weekly basis, the cotton market has been consolidated since early June. Only two brief runs near or above the 90.00 level have shortly violated the consolidation. The length of the price range constriction signals that a break could be severe.
On that note, aside from the obvious losses, is the fact that the last two settlements have been below the lower Bollinger Band and the distance between the moving averages is getting wider while the market has already settled below all near term support and is now searching for a bottom. The last time this occurred the bottom was near 68.00 and 66.00 for weekly settlement and low values.
Dec 13 and Mar 14 have two foreseeable opportunities to quell the current bearishness of the market: the weekly export report on Thursday and the WASDE on Friday. We expect exports will be brisk once again; the average price of Mar 14 for the next report sales period was 80.04 vs average prices of 83.16 and 84.41 for Dec 13 and Mar 14, respectively, over the three week sales period last reported upon.
The results of those reports were pleasantly surprising, and we expect the next report to be at least as encouraging. Also, we believe the market is expecting larger production from India; we expect the USDA to stand pat at 29.0M bales, or perhaps defer to the latest estimate of their attaché (28.6M). Regarding the US, if exports are again surprisingly upbeat, look for the USDA to raise US exports a bit and cut into any carryout increase a production upgrade might bestow.
And, on that note, the latest crop insurance loss data reveals that upland cotton is a losing proposition this year. The aggregate loss ratio is just a fraction above 100%. For Texas, it is nearly 140%. These numbers have steadily climbed since just prior to harvest, with more losses likely to come.
We hope we are incorrect, but increasing crop losses, especially during the harvest season, are not normally indicative of a crop that is getting larger.
For the week, we will call for another loss. The speculative sector will want to see compelling evidence before committing to large long positions again. We think Dec 13 will spend considerable time this week closer to 70.00 than to 80.00.
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 Arkansas State, Oklahoma State and the University 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.
