The ICE Dec contract finished the week just north of unchanged, gaining 38 points to settle at 68.80. The Mar contract added 12 points at 68.23. Nothing earth-shattering, but the Dec – Mar spread did manage to strengthen to an inversion of 54 points.
Demand continues to support the market while the prospect of large domestic (US) and international crops are keeping specs cautious, leaving the passively managed index funds to be responsible for a disproportionate share of the marketΆs long futures positions.
The demand side should continue to support our market, what with the merchants strengthening basis quotes and the mills seemingly not batting an eye at purchasing said basis. It is understandable that merchants are growing somewhat wary of continuing to sell the 2017 US crop, with just shy of 60K bales from the Rio Grande Valley having yet been classed.
Still, no matter.
New crop export sales for the week ending July 20 were around 250K running bales, leaving outstanding sales against 2017/18 at around 5.5M 480lb bales. This is not a record, but this yearΆs total is definitely within the upper echelon. US merchants even managed to scrounge nearly 30K running bales of the 2016 crop to offload while shipping nearly 350K bales.
And, although some seemed puzzled at the marketΆs refusal to break through 70.00 on the latest round of export data, at the time of the reportΆs release Dec was already trading from 200 to 300 points on where most sales over the most recent assay period were accomplished. It was, in essence, already “in” the market.
Weather wise, the Cotton Belt may finally be getting a reprieve from the extremely hot and arid conditions experienced over the past two weeks. There is upward of a 50% chance of precipitation occurring across most of the Cotton Belt over the next 5 days. Precipitation is expected to be accompanied by much cooler temperatures and lower humidity.
The entire US crop has progressed well and accumulated heat units to date, but a nice August 1st rain would greatly improve yield potential and ease irrigation demands during peak bloom on what looks to be a pretty good cotton crop.
We are hearing of excellent yield potential across areas of Texas and Georgia, and after our recent crop tours of the Midsouth territory, we can say for a fact that the crop in this region has potential as well. Only Mother Nature knows what she has in store for the remainder of the growing season and she will dictate the outcome as she always does.
Internationally, heavy rains and flooding across Gujarat, India have drowned some of this seasonΆs acreage while reportedly slowing continued sowing of this yearΆs crop. An estimated 120 lives have been lost due to flooding within the region.
However, from a high perch, rain (so long as it is not entering oneΆs dwelling) is generally viewed as positive. And, even when flooding occurs across a region, yield potential in adjacent areas often increases.
China continues to off load its reserves, with the central government having rid itself of around 9.5M bales since early March. In the Mediterranean region, hail storms moved across portions of cotton producing regions within Greece yesterday. Overall losses were small, but were also mostly complete where the marble-size and larger stones fell.
Forward Contracting spent another week in the summer doldrums. Any grower with more than a few seasons on his resume has been here before, and should know that there are weeks when the only reasonable strategy is to follow the irrigation and spraying schedule your scout recommends, be sure you have a GTC order with your local broker, and take advantage of an opportunity to go fishing for a few days.
Should Dec move into the low 70s, weΆd recommend contracting an additional portion of your expected yield, but opt for a rule 5/FOB contract that leaves open the possibility of collecting an LDP payment this fall if the crop should come in larger than currently expected.
It is also worth considering the likelihood of a strong spot basis in the early weeks of the harvest. Producers going into the harvest with unfixed cotton could conceivably earn an extra premium if their cotton is early and high quality. Long staple middlings in early October will likely be worth more than the same bales in early December.
For next week, the standard weekly technical analysis for and money flow into the Dec contract remain bearish, but the Dec contract also remains somewhat oversold. Still, the market could work off this condition via continued range bound trading.
We need a catalyst to move meaningfully higher.
Have a great weekend!
