ICE July cotton gave up 36 points on the week while the Dec contract, now the de facto lead month, picked up 6 points, settling at 63.91.
Old crop soybeans were the hot market this week. They were simply on fire, despite a week ending sell-off. However, even as they did their part to hold their sister grain marketsΆ collective heads above water, they simply could not light a fire under the cotton market.
The difference between soybeans and cotton is the demand side of the equation. Soybean (and associated product) demand has more or less kept up with recent record crops in the worldΆs major producing regions. Hence, what would occur if the world should experience (as cotton did last season) less than spectacular yields, much less a disaster? And it is becoming more of a certainty that the South American crop was not nearly as productive as originally thought.
Still, it is not so much that the soybean S&D balance sheets are bullish; rather, they just exhibit the greatest propensity to become so. With respect to corn, a projected US carryout approaching 2.2B bu is anything but bullish. If the crop continues to do well, it will likely mean an out-and-out bearish move at some point this season. The energies alone will likely not be able to sustain a rally much stronger than what we have already seen.
CottonΆs fundamentals most closely resemble wheatΆs among the grain markets, at this time. There is simply too much of it while demand is not strong enough to significantly erode the worldΆs massive supplies.
Still, demand for and shipment of US cotton continues to be stronger than the pace required to meet the USDAΆs 9M bales export target for the current marketing year.
The USDA will release its June WASDE report on June 10, just before I (hopefully) pen another edition of this column. We will postpone our predictions for that report and reactions thereof until the crystal ball becomes clearer.
Still, while I have not yet fully considered what the USDA will say next Friday, I expect that there will be very little change from the May report. The 2015/16 marketing year is nearing its close, and, as such, everyone has closer information than just a short while back. With respect to the new crop, I would expect that the USDAΆs aggregate world and US production projections might contract just a bit. Droughty conditions in Australia and parts of West Africa coupled with a delayed monsoon and shrinking acreage estimates in India make an appreciable increase in the projection seem unlikely. Here at home, we are not off to the best possible start, and I think that it is probable that US yields will be projected a tad lower Vs the last report. Abandonment could also be projected just a bit higher Vs May.
Still, the USDA is bound to employ the March 31st acreage expectations in its calculations. So, the July report, which will be released shortly after the annual June 30 acreage report, will likely be more interesting than next FridayΆs edition.
Spot marketing remains in a holding pattern. Barring a significant weather event or surprises within the June 30 report, there are few incentives for producers to commit to current contracting options or prices. As always, producers should stay in touch with their buyers, but we think they can safely focus most of their attention on making a crop for the next week.
For next week, the standard weekly technical analysis for and money flow into the Dec contract remain bullish, with the market in only a slightly overbought condition. Export sales for the week ending June 2 are likely to resemble those reported this week. Again, shipments could remain strong. Index fund rolling continues next week with commencement of the Goldman roll while China will take next Thursday and Friday off in celebration of the annual Dragonboat Festival. The old crop – new crop spread remains inverted, which would suggest that obtaining some protection on any significant Dec rallies is likely prudent.
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; Twitter: @RoseCottonRepor
