The bulls posted a modest 126 point win on the week as the Dec contract settled at 88.34.  The Dec – Mar spread moved to even on Tue, but finished the week inverted at 20 points.

Overall, it was yet another slow week for domestic news pertaining directly to ICE cotton futures, although President Trump did announce that a subsidy will be made available to most US farmers (including those who produce cotton) to help offset any losses incurred as a result of strained trade relations resulting from with his administration’s levying of tariffs, particularly against China.  West Texas saw some rain and shower activity on Thursday, but it was far from the drought-buster that is so desperately needed by our friends in that part of the country.

Demand

Demand for US cotton remains seasonally strong, with the shipment pace ticking up for the week ending July 19.  Total net sales and shipments against the 2017/18 marketing year were around 8K and 320K running bales, respectively.  Shipments were off the pace required to meet the USDA’s 16.2M bale export projection.  Still, whether or not 16.2M+ bales actually get shipped by July 31 is now a mute point, with shipments in early Aug most likely to remain relatively strong, thus forcing some changes to the arithmetic of the USDA’s balance sheets, which should result in little (if any) material change in projected ending stocks for the upcoming marketing year.

Total sales against 2018/19 were also off modestly Vs the previous period at around 204K running bales; sales against 2018/19 stand at a running total of more than 6.6M 480lb bales.

Exports

Uzbekistan has reportedly announced it will ban all exports of cotton from 2019 forward; it is widely postulated that the nation is doing this to garner favor with China in hopes of enticing the latter to continue investing in Uzbekistan’s textile industry.  A trucker strike in India, in retaliation for high diesel taxes, has threatened to hobble the nation’s textile industry.  In other news, noted international analytic firms are, in general, projecting US 2018 cotton production lower Vs the USDA’s July figure while also shoring up estimates of aggregate world consumption.  A consensus seems to be forming that a tightening of the USDA’s balance sheets will be evident in the August WASDE report.

Patience Should Pay Off

We still believe a move to the low-mid 90s in the Dec contract is likely in the next few weeks, but also recognize the historic tendency of the market to move slowly in July and August. Given the weather issues in the high plains, it is far easier for us to argue for a smaller crop than for a larger crop. Producers in areas with better crop conditions should remember that principle as well, though, before contracting more than 65-75% of estimated yield. There is little reason to expect a wider spot basis at harvest than the contracting basis today, so patience should pay off one way or the other.

The more interesting question for producers is the 2019 crop. With a relatively attractive basis and Dec 2019 futures in the 80s, producers can lock up some attractive prices today. Whether those prices will prove to be the best prices seen for 2019 is another question entirely, so we recommend considering call options against 2019 crop sales to participate in any potential rallies.

For next week, the standard weekly technical analysis for and money flow into the Dec contract are supportive to bullish.  We continue to think that the ICE cotton futures have upward potential.

Have a great weekend!