ICE Mar cotton futures gave up 2 points this week while trading a very tight 113 point range. Dec 16 futures held their own, as well – giving up a mere 20 points and settling at 64.96.
At the close of last weekΆs column, we stated that we thought that US net export sales for the week ending Dec were likely to be improved vs the previous period, but likely still somewhat disappointing. Upon reviewing several sets of data this week, our expectations were altered to a more optimistic forecast.
We were closer the first time.
Still, we refuse to get too depressed ahead of the New Year. It is the holiday season and most nations and cultures across the globe experience some downtime at this time of year. Yet, as much as I like the Brazilians and their generous hospitality, they may be partly to blame for the recent slowing of US export sales with the nationΆs domestic demand for raw cotton reported to be softening notably.
The supply side is still supportive, if not friendly for producers. We expect US production to shrink a bit more vs the USDAΆs Dec projection while estimating agencies across the globe seem to continue to downgrade both production and quality within their respective nations. Cotton Outlook has moved its estimate of US production to 12.85M bales, and we certainly think this is plausible – as we have stating within this space for some time.
Regarding the specs who provide much of the liquidity for our market, their cost of capital will be a bit higher over the near term, at least with The Fed having voiced plans to gradually increase rates through 2018. Although much of the US rate increase was expected, we do not see it as bullish for our market in any manner.
Available producer cotton continues to sell at a brisk pace, creating a shortage of desirable qualities in many regions. That may leave producers still holding cotton in the catbird seat with regard to basis, assuming mill demand remains at least consistent into the spring. Producers should be cautioned, however, that if the nearby contracts continue to trade in a relatively flat range, basis gains may not offset the cost of storage and interest for very long. We advise producer selling in any rally to or above 65 cents, with an eye toward buying Dec 16 calls, essentially rolling a portion of your 2015 crop into 2016 to take advantage of planting season rallies.
For next week the standard weekly technical analysis for the Mar contract is supportive while weekly money flow into the Mar contract is neutral. Next weekΆs trading action will include 3 full days and one truncated session on Christmas Eve. Although holiday trading is often slow, this yearΆs Thanksgiving week trading was eventful. We could see more of the same over the coming two weeks.
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
