The front month has suffered its second consecutive weekly setback, albeit a minor one. It is not so much the loss that concerns us as the failure of the front month to muster enough strength to either touch resistance near 85.50 or to post a daily settlement above 85.00 during the current uptrend.
US export net sales for the week ending December 2 were dismal at just over 75K RBs for all cotton. This marked the second consecutive week of US net sales below the 100K RB mark. The holiday season most likely had some hand in the poor net sales figures, but upwardly trending futures prices, a strengthening US dollar and a stronger basis may have played larger roles.
Also, after a spree of international purchasing from October 3 through two weeks prior, most mills may be covered as far as they care to be; post the bull market of 2010 it is seems almost foreign to entertain the notion of significant stocks being carried at mills.
The generally strengthening US economy has increased the value of the US dollar, which refreshes our memory of the dichotomy involved with cotton. That is, a strong economy in the US spurs the purchase of the semi-durable value-added items fashioned from the fiber, but it tends to crimp sales of US raw cotton to international destinations. But, overall, this is preferable to the plunging demand for cotton products and loss of market share realized during recessionary periods.
On-call sales of cotton have recently decreased slightly. Fixations conducted on the front month at futures prices near 83.00 were encouraging, but declining on-call sales for the deferred months and this weekΆs posting of zero on-call sales against the 2014/15 MY were not encouraging for bulls.
Fixation orders of on-call purchases against Mar 14, largely rolled by producers from Dec 13, await price spikes within the front month. .
Approximately7K contracts of on-call purchases remain yet to be fixed.
The WASDE report was not supportive, as many of us thought it would be. Our hats are off to the analysts that managed to call it correctly. A generally expected reduction of the US and world ending stocks figures were found to be unchanged and raised nearly 1M bales, respectively.
Since all but 200K bales of the increase was within China, the balance sheet is largely unchanged from Dec. A slightly lower world demand estimate is likely attributable to a continued loss of market share for cotton vs other fibers.
Post the dissemination of todayΆs ginning and classing reports, our estimate of total US production now rests at an even 13M.
Looking forward, next week will be a light agricultural report week, but there will be numerous US economic reports issued. Should these continue to foster optimism, the US dollar will likely follow suit and futures prices should come under pressure.
The export report is likely to be short once again. The average futures settlement for the front month of the assay period is nearly on par with the average of the last two sales periods from whence poor sales were derived. The US dollar and the basis, per the A-Index, are a bit stronger, too.
Technically, our analysis favors a move lower on a negatively skewed trading range, which would likely find greater physical demand. The long upper shadows on the daily and weekly candle charts – which evince failure to recently close at least within the middle of trading ranges – is troubling.
And, although we did not see an immediate market plunge post the WASDE report, we should bear in mind that cotton was likely buoyed by the grains and a slightly weaker US currency on the day.
We remain friendly Dec 14 into the low- to mid-80s sometime prior to planting season. The competition for acreage may boil down, in many areas, to that with soybeans. A late crop may be many things, but it is rarely inexpensive and usually returns a thinner profit margin. A premium may be required to prompt producers to forget the nightmarish production conditions of 2013 and opt for cotton over less capital intensive soybeans.
For the week we will call for near unchanged to lower while trading a range of 80.75 – 84.24 on the inside or 80.00 – 85.10 on the outside.
Louis W Rose IV, PhD has worked with cotton as a producer, consultant, analyst and trader. 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.
