We have said in this space several times since the New Year began that we thought the time was not right to price new crop cotton and that we expected to see a pre-planting rally. Although Dec cotton trading between 62.00 – 63.00 is hardly exciting, the manner in which it (and the nearby July contract) ascended this week were impressive with July and Dec picking up 307 and 331 point gains on the week.
The ICE front month has been a winner now for 7 consecutive weeks with nearby highs in excess of 1000 points on the market’s recent sub-55.00 low.
Part of the credit for cottonΆs stellar performance this week likely lies with China, as investors flock to commodities futures investments and with the delay auctioning of ChinaΆs reserve stocks leaving many mills wanting for nearby raw material. Overall, the flight to commodities in China has been so fervent that China has raised both daily limits and margin requirements for many commodities, including cotton.
It did not hurt cottonΆs fortunes this week that, with the aforementioned tightness of nearby supply in the worldΆs largest consumer of raw cotton, the NDRC publicly stated that it did not necessarily have to halt off-take of reserve stocks at 2M MTs (about 9M bales).
Weaker US currency and strength in the grains, particularly soybeans, was also friendly for cotton this week. New crop soybeans soared to around $10.25/bu this week on the highs (although they finished below $10.00/bu) and we have talked to some local producers that have sold soybeans and are switching some acreage originally intended for cotton this season into cultivation of the oilseed.
Export sales were not particularly strong for the week ending April 14 at just over 100K running bales, and shipments continue to lag the pace required to meet the USDAΆs export target. However, there is a steep old crop – new crop inversion, and this, as it has in years past, may cause merchants to relent on basis to mills, especially considering this yearΆs domestic quality being significantly below par. Hence, shipments could improve as we head into the home stretch of the 2015/16 marketing year. Still, we are not yet sold on exceeding the USDAΆs target by much, if any. However, we are likely to see strong shipments very early in 2016/17.
The cotton trade continued to buzz this week about last Thursdays surprise adjustment by the USDA of the transportation adjustment component of the AWP. While our friends in Washington remain surprisingly quiet on the issue, the immediate impact of the 2 cent devaluation has effectively thrown a wet blanket on forward contracting, and raised questions about the stability of the AWP going forward. We had hoped to have more information by this week, but the NCC and the USDA remain mum beyond a general assurance that they are talking.
Given this, producers eager to hedge their downside risk might consider buying Dec puts on “rallies” over 63 cents. While we think the downside risk in cotton is limited, and see several bullish factors looming in the mid-long term, insurance is never a bad idea. Further, the current inversion has the potential to pull Dec down, and could offer a short term profit on short Dec positions. Certainly, any rally much north of 6500 base Dec has the potential to draw substantial volume from producer selling, and given the increased volatility from Chinese specs, any correction could easily be over-done.
For next week, the standard weekly technical analysis for and money flow into the July contract remain bullish, but the market is overbought. Export sales put forth on the next US report are not likely to be strong, but shipments could increase over the near-term.
Have a great weekend!
