Things have changed for the cotton market. All of the support, perceived price floors and bullishness either gave way or evaporated during the early portion of the week, and now one must look northward to see the 80.00 level.
We are a bit humbled, as we were in the camp that thought that price would hold above the 80.00 level, at least.
Dec 13 began its week at 83.11 and finished it at 79.08 for a loss of 381 points and traded within a very negatively skewed 464 point trading range. Dec 13 set 9-month records for daily lows this week as well. Weekly, the front month has not settled this low since Jan 18, when Mar 13 finished itΆs week at 78.55, and only once between then and today did the front month finish below 80.00. Dec 13 OI dropped approximately 8K contracts while Mar 14 picked up around 4K.
The USDA returned to work, but the information still is not updated, with the exception of the weekly crop progress reports from NASS, which continue to convey that this yearΆs crop remains woefully behind schedule.
However, the most recent report did note the subjective perception that this seasonΆs crop has improved. The Dow Jones Cotton Crop Condition Index improved two points from the previous estimate to 91. We have cautioned about improvements in the yield of the US crop all along; promising weather toward the end of a growing season cannot completely erase the effects of less-than-adequate conditions over much of the growing season.
On that note, we have changed our tune just a bit.
Close to home, for us, in the north Mississippi River Delta, we check with clients, family and old friends on a near daily basis, and, overall, we are hearing that yields for this season are better than expected. In most cases, that means somewhere near the 5-year rolling average. We hear the same things as well from contacts in TX and the southeastern states – yields, so far, are better than expected.
But, back to the USDA data stream: USDA agencies will not be completely back on schedule until the Nov 8 release of the WASDE and Crop Production reports. US export data, on-call sales and purchase data and commitments of traderΆs information should regain up-to-date status this week.
Cotton exports for the week ending Oct were abysmal at a net 44K RBs of upland sales; ELS-type sales remain strong. Yet, it was probably less the 44K number and more the 72.8K RBs of upland cancellations that sparked the selloff. Some of this should have been expected, as the average price for the corresponding sales period was 86.95.
Going forward, we do not see a lot of illumination in Dec 13′s short life. Eighteen trading days remain before first notice day and this is the time that speculators liquidate longs in the front month and roll to the out month. Combine with this with harvest pressure, the weakening Dec 13 – Mar 14 spread and ever-increasing certificated stocks, and the obvious technical weakness of Dec 13 and there is not much to get bullish about.
It is further rumored that greater availability of domestic cotton in China is available to mills per the stricter enforcement of quality parameters by the CNCRC. And, we suspect that the majority of those 22K contracts of on-call sales that remained to be fixed on Sept 30 have so been done at this point.
It is possible that a large merchant could buy the board and force a squeeze, but that possibility is growing more remote on a daily basis.
The few positive notes that we see are some potential bullishness in the WADE report. USDA will most certainly trim China production significantly and it is not certain at all that US production will realize a large increase in estimated production. Further, despite reports from the Indian government about the crop size within their nation increasing, the USDA attached reduced his estimate 400K bales to 28.6M vs USDA at 29.0M statistical. Our bet is that the USDA stands pat.
Exports should also improve. The USDA will release data for the weeks ending Oct 10, Oct 17 and Oct 24 on Thur, Oct 31. The average prices for the sales periods were 84.74, 84.54 and 83.07, respectively.
Our technical and statistical analyses can only let us call for the market to trade lower next week. The next major technical resistance is expected to be near 76.50, and down to 75.00 is certainly possible. We doubt we will see Dec 13 spend a great deal of time above 80.00 for the week.
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.
