ICE Mar futures scored its fourth consecutive weekly win this week, gaining 78 points at 64.71. Mar has gained nearly 300 points over the last four weeks. And, cotton has accomplished this feat amid surging US currency that, despite a selloff from above par on Thursday, remains very strong.
The US has now logged approximately 1.1M running bales of net sales over the last 5 sales periods.
It is quite evident that there is demand for US cotton north of 6200. And still – everywhere I look and listen – there continue to be reports of weak demand for US cotton for export.
By no means do we fail to acknowledge flagging world demand for our fiber, but it seems all too obvious that mills stayed away from the table in anticipation of sourcing the normal ratio of quality US cotton. And it just ainΆt gonna happen.
Personally, I have heard little on this topic directly from the merchant community. But this is most likely because I do not press them about their business. With a handful of exceptions, I like the folks who earn their livings in this sector very much, and I see no reason to put them on the spot with questions that they are better off not answering (truthfully, at any rate). The last second hand information that I received was that things for our middle men were very difficult, indeed – what with the strong basis to producers and weak basis at destinations. But I notice that cotton is being sold, nonetheless.
All eyes will intently turn to the final USDA WASDE report of 2015. Most analysts (us included) expect further reductions to both aggregate world production and demand, with cuts to production expected to outweigh those for consumption. However, Cotton Outlook and the International Cotton Advisory Committee have projected 2015 US production at very near 13.3M bales. We continue to think that the US crop will likely fall to below 13M total bales – and perhaps significantly so – on the final tally. Informa Economics has pegged the US crop at around 12.9M bales.
Regardless of varying opinions regarding US export sales, US cotton is being committed and the latest data will likely ensure that the USDA will not lower their US export projection in Dec – at least not unless the production projection falls precipitously. Hence, it is quite possible that US ending stocks could, for the first time this marketing year, be projected at less than 3M bales, which is a bullish harbinger.
Producers continue to enjoy a very strong spot basis, despite quality that is predictably slipping as the season progresses. Coffee shop rumors and conspiracy theories propose a variety of phenomena underlying this strong basis, but the simple fact remains: Spot basis has been historically strong for the 14/15 crop, and continues to be strong. That shouldnΆt, however, suggest that it will remain similarly strong into the spring. We encourage producers to sell spot cotton on Mar rallies over 6400, and to buy calls if they are bullish beyond those levels.
Many producers are starting to work on planting and marketing plans for 2016. Some may disagree, but the gurus we share ideas with think the market is telling US growers to be diversified. We concur, but do note that our crystal ball shows 5-10 cents potential above current levels in the Dec16 contract.
A call from one of our readers today reminded me that, with the current relative cheap energy prices that are prevailing, hedging with either futures or options should be explored. The downing of a Russian fighter jet by the Turkish military near the Syrian border recently should serve as a reminder of the ever present potential for volatility associated with this vital agricultural input.
For next week the standard weekly technical analysis for and money flow into the Mar contract are bullish with the front month only beginning to show signs of becoming overbought on a weekly basis. Next week is mostly about the WASDE report; projected US ending stocks below 3M bales will likely aid in keeping bullish momentum flowing.
Have a great weekend!
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
