The bears continue to maul our market. The Dec and Mar contracts gave up 236 and 240 points on the week, respectively, although July picked up 77 points ahead of its notice period. The Dec – Mar spread remains very near flat.
The basic story is the same as it was last week – demand fundamentals are supportive while supply fundamentals are questionable. Still, ahead of next week’s annual USDA planted acreage report, funds continued to liquidate cotton contracts right along with the energies and the other softs. Weakness in the grains did not help cottonΆs cause.
Internationally, after a planting season nearly void of weather concerns, some traders are now becoming wary of recent dryness across portions of China and the lack of monsoon development across producing regions within central India.
The US cotton crop progress and condition ratings continue to be an extremely mixed bag as our field observations and field reports continue to be all over the board.
West Texas and the Desert Southwest experienced record setting heat over the past week, accompanied by reports of stress on young cotton stands. We continue to hear reports of West Texas acreage that has struggled with emergence due to lack of moisture. The crop in southern Texas continues to progress nicely.
The Midsouth crop has improved and is in relatively good shape, but not great and we consider it to be a little later than most would like. Recent rainfall accumulations from 2-7 inches via tropical storm Cindy have the crop in good shape moisture-wise with sunshine and heat units needed now.
In the Southeast, Alabama has recently received too much rain with many fields having been flooded and fieldwork interrupted across many other areas. Recent rains have also slowed field work in the Carolinas. The bright spot in the US is perhaps Georgia, as timely rains up to this point have the crop looking good and progressing on schedule.
US old crop export sales rebounded for the week ending June 15 while shipments remained on pace to meet the USDAΆs 14.5M bales export projection. Still, our models suggest that 2016/17 US exports will likely be realized at 14.1 – 14.25M bales.
New crop sales were reported at a nearly unbelievable level – near 435K running bales. We take solace in the fact that foreign mills have been large buyers of US cotton at prices around 400 points higher than where the market traded to on its lows this week.
Producers looking for an opportunity to price cotton this week are in an unenviable position. The basis remains steady, but a Dec contract 7 cents below fixation orders doesnΆt bode well for forward contracting until after the June 30 report at earliest, but more likely following the July WASDE report release.
One thing does look clear from where we sit – forward contracting strategies should shift their focus from equity contracts to Rule 5 / FOB contracts.
If the Texas crop should catch rains right in July and August, we could be looking at an LDP/POP payment in September. A fixed price on a July rally with a harvest time LDP doesnΆt happen often, but the possibility exists this year.
It is also worth noting that we have heard from a couple of our friends with the MMMs (Major Multinational Merchants) that plans are afoot for a major buying spree later in the season. It is always risky to bet your grocery money on rumors and innuendo, but if growers were entirely averse to risk, theyΆd quit farming and get a job in town.
For next week, the standard weekly technical analysis for and money flow into the Dec contract are bearish, but the market is also much oversold. Next weekΆs trading will be framed by an expectation for another round of strong US export data to be released, the June 30 acreage report – and how such is likely to affect the USDAΆs domestic projections on the July WASDE report.
Although we still have some fine-tuning to do on our planted acreage estimate, we think that the USDAΆs will estimate planted area at around 12M acres. However, the current official 10% abandonment rate across Texas will likely have to be revisited.
Have a great weekend.
