The Bears have made it three in a row, but this week’s win was farm from convincing – shaky even – at a mere 37 points. The May – July spread strengthened slightly to (39); the old crop/new crop straddle tightened, as well, but remains strongly inverted at 407 with the Dec contract finishing the week at 77.73, up 7 from last Friday’s settlement.

News this week was more supportive than not, at least to our thinking. US GDP figures were strong and there has been some easing of tensions between the US and China, owing in no small part to a state visit to the latter by North Korea’s Kim Jong Un.  Demand remains very strong and a general rain has yet to fall across West Texas.  We hope the drought abates in the very near future.

The USDA has officially projected US area committed to cotton at 13.5M acres (our number, exactly; blind hogs and acorns, etc).  The figure was higher than the average trade estimate, but well off the 14M that some have predicted.  This number is (of course) etched in sand, and will remain a focal point through early July, at least. We think the final number has a strong chance of being closer to 14M than to 13M acres.  Corn and soybean projected acreage numbers were significantly below published trade expectations.

Export Demand Continues, China Focusing On Quality

Demand for US cotton for export continues at near a breakneck keel.

Total net sales were modestly lower Vs the previous sales period while shipments were higher at approximately 317K and 464K running bales, respectively.  Total sales against 2018/19 were nearly 64K running bales; sales against the upcoming MY currently stand at a running total of approximately 2.9M 480lb bales.

We are now projecting 2017/18 exports at 16M – 16.5M 480lb bales.

Internationally, the China Cotton Textile Association has urged the central government to add high quality stocks to its strategic cotton reserves via imports.  Although the recommendation is far from an official proclamation of what is to be, we think that such buying by China is plausible – and likely wise.

How Much Gloom, How Much Doom?

Producers heard doom and gloom from buyers this week. Talk of increased acreage, problems with shipments and the potential for rain in West Texas all inspired talk of a post-report selloff. Some of this talk may have simply been salesmanship – merchants would like to have more cotton forward contracted than they currently do – but many in the trade believe we are overdue for a 3-5 cent correction on the Dec contract.

Their argument is that this correction is necessary to put money back in spec pockets to fuel another leg up, and to shake producers off their loftier price expectations.

Today’s report and subsequent close leaves us in the ambivalent camp. On the one hand, it’s hard to argue with a Dec that just won’t sell off, dry conditions in Texas and strong foreign demand for US cotton. On the other hand, experience tells us that the air gets pretty thin above 80 cents, and that the option pit is the safest place to play out your bullish strategies.

Our advice for producers this coming week is to look for pricing opportunities above 7900 and not to let 80 cents pass without having 30% of expected production planted. More aggressive bulls will want to offset forward contracting with call options, or even opt for an all-put option pricing strategy. There will likely be a chance this year to price cotton over 80 cents, but the possibility of a simultaneous correction, Texas rain, and Chinese tariff surprise is lurking.

For next week, the standard weekly technical analysis for and money flow into the May and July contracts remains supportive to bullish.  The formidable on-call position held by mills could certainly spark a sharp rally against the July contract prior to first notice day.  Index fund rolling of longs continues next week.

Happy Easter!