After nearly a month of weekly data that was, at times, arduous with respect to either writing or speaking about, Dec 13 seemingly picked a direction to pursue.
The direction was up, to the tune of a 211 point gain on the week, which makes this column easier to write because that had been our prediction at this time last Friday. Over the previous 4 weekly closes Dec 13 had gained only 44 points, after giving up 924 in the collapse that began at a daily high of 93.72.
Dec 13 began the week at 84.50 and reached its weekly low on the same day while finishing the week on its highest daily close in 5 weeks and reaching its weekly high (86.98) today as well. Dec 13 did it, largely, on continuing concerns about the size and quality of the crop that is either now, or will soon be harvested within the US, published reports that seriously call into question the size of ChinaΆs current crop, growing concerns about the size of IndiaΆs current crop due to too much precipitation and a weakening US dollar.
This week began with a crop condition report (USDA-NASS) that lost one point on the Dow Jones Cotton Crop Condition Index; TX and OK were again responsible for most of the deteriorating conditions reported. Statistics presented in the report concerning percent of the current crop that exhibits open bolls or has been harvested only served to remind traders of the lateness of this seasonΆs crop, with October now looming.
This notion was reinforced by the Cotton Ginnings report (USDA-ERS), also released this week, stating that only 5% of this seasonΆs crop has been ginned versus a rolling 4-year average of 10%; TX was responsible for the vast majority of ginnings with LA responsible for the balance. TuesdayΆs Commitments of Traders report (CFTC) showed a small increase in the net long (futures only) position for large speculative funds and non-reportable positions combined, which correlates nicely with the modest increases noted in open interest (OI) over the past week.
ThursdayΆs weekly cotton export report (USDA-FAS) was reportedly close to trade expectations with approximately 87K RBs (89.2K US 480s) of new net sales for the current marketing year (MY). However, the market hesitated only briefly before choosing to ignore the sparse sales numbers and head further northward. The issue with the report, per our vantage point, was the large number of cancellations (12.5K RBs) and the large number of ELS-type sales (approximately 21K RBs).
ELS sales are a less accurate reflection of demand as measured against levels of current futures prices. Still, the drop off in sales was expected by many, the average weekly price, per the assay period, was 84.63, with a weekly low of 83.70; the previous assay period exhibited a weekly average price of 84.06 and a low price of 82.25.
The marketΆs reasoning, we think, for seemingly paying so little attention to the export report was a news release by the China Cotton Association stating that it had reduced its current crop production estimate in excess of 2M bales to merely 29M bales, a figure 4M shy of the USDAΆs last projection for China production.
And, though I do not expect that many believe the USDA will reduce its China production projection by 4M bales, we think it reinforces the markets assumption that China production will be significantly off this year. Also on Thursday, the CFTC released it on-call report, which showed that a small number of fixations had occurred against Dec 13 during the week previous while new on-call sales remained essentially flat; approximately 21.5K sales contracts currently remain to be fixed against Dec 13.
The bullish news continued to pour forth on Friday as Dec 13 opened at its low for the day (85.48) and seriously tested the 87.00 level multiple times. Cotton Outlook announced that it was reducing its estimate of current season production in China by approximately 900K bales to approximately 32.1M bales while news out of India stated that the Indian government was currently removing all export incentives for both raw cotton and cotton yarn.
And, now weΆll tackle the difficult task – looking forward to next weekΆs Dec 13 trading action.
Fundamentally, we expect the condition of the US crop (or at least its production estimate) to worsen a bit; the latest USDA-RMA (crop insurance) data shows that a loss ratio of 90% currently stands for all upland type US cotton (90% of premiums paid out in indemnities) versus 85% at this time last week. The upland type loss ratio for TX is now at 127% versus 121% at this time last week.
Regardless of improving weather conditions, it does not seem to be getting better with respect to the final US production number. Also, we would expect yet another light export sales report due to the recent elevation in price.
Technically, Dec 13 has made a move to break from its nearly month-long consolidation; still, confirmation of a new uptrend via a settlement on Monday greater than 87.00, and preferably greater than 87.50, would add fuel to the fire.
Above 87.11 there is very little technical resistance to keep the market from closing either of the overhead gaps at 88.65 – 88.86 and 92.78 – 92.86, but considerable fund participation, we think, will be required to do so because we do not believe that current fundamental changes will incite either large amounts of new physical business to be transacted or a large number of fixations to occur.
We believe that the first gap (88.65 – 88.86) has a respectable chance to be filled this week; we are less certain about the gap within the upper 92 level, although, technically, most gaps do become filled. But that certainly does not mean that Dec 13 will be higher again at this time next week.
If the gap(s) are filled, we currently think it will be a short-lived run as speculators have a sense of where physical demand is, and, hopefully, producers counter with selling pressure before Dec 13 once again retreats to meet physical demand. At this time, employing the knowledge that we currently possess, we do not foresee Dec 13 sprinting for the century mark.
For the week, we think Dec will reach higher, but we would not be shocked to see it settle next Friday near unchanged or lower.
