ICE Mar futures gave up 38 points this week on tepid US export data, although the latest export report did not pack enough bearish punch to push Mar below the 63.00 level. On a rolling front month basis the Mar contract finished near unchanged, giving up a mere 4 points in Dec. For the year, the front month picked up 437 points.
As trying, and sometimes depressing, as 2015 was for cotton producers, ICE cotton stood out as the sole gainer among the 22 commodities that comprise the Bloomberg Index. Such illustrates the poor performance of the commodity sector over the last year. Cotton’s calendar year performance may, however, be at least as much attributable to seasonal timing and serendipity as it was to positive market factors.
With respect to the Dec contract – the contract of greatest interest to most producers – a late planting season, coupled with a strong el nino, led us to think that Dec futures would challenge the 70.00 level during 2015. However, with worldwide macroeconomic concerns and the seemingly ever increasing relative value of US currency casting doubt upon initially optimistic worldwide demand forecasts, 68.11 was as close as it ever came.
Looking ahead to next year, the cotton market will likely continue to reflect an expected tightening of US ending stocks – the July contract has already inverted over Dec (a condition that may foretell a supply push of US stocks for export as merchants avoid an old crop – new crop inversion, a situation that occurred last year). Too, given current reports, world production for the current marketing year is also likely to continue to shrink while consumption projections seem to have stabilized.
Still, there are negatives aplenty on the radar screen for 2016.
One of the foremost concerns is the rising cost of capital for the speculative sector via the recent and expected continued gradual increase of interest rates. The specs, who most often hold net long futures positions (vs the tradeΆs inherent short position as inventory holders) tend to be a generally beneficial market presence for cotton producers.
It is our opinion that many producers need to develop a closer understanding of the mechanics of how the specs and index funds function. Although capital, in general, remains “cheap”, we would expect some curbing of fund participation going forward. Rising interest rates will also boost the relative value of US currency – a phenomena that will likely ultimately enhance downstream demand – will not do any favors for US export demand. Further, if cheap energy prices – which translate into tremendous input savings for producers – persist, cottonΆs worldwide fiber share may continue to shrink with increases in gross consumption possibly being mostly attributable to increases in population.
With respect to competing crops, cotton has a higher relative value at this time vs major competing grains than it did at this time last year. Too, cotton producers are unlikely to find grain sorghum as profitable as it was last season with the curbing of ChinaΆs imports of the commodity. Most producers that we talk to and that we have read interviews with relayed a willingness to increase sowings in 2016 Vs 2015.
On the whole, most analysts and investment banks that have published reports have, to date, been more bearish than not for cotton in 2016. However, given the continued tightening of the US and “World less China” S&D balance sheets, we continue to see the potential for 5 – 10 cents of upside to the Dec contract.
Maybe we will get it right this time.
US export sales for the week ending Dec 24 were off modestly vs the previous sales period while shipments increased. Both figures were below the weekly pace required to meet the USDAΆs export projections, but we did not think them horrible, considering the season.
For next week the standard weekly technical analysis for the Mar contract is supportive to bullish, but weekly money flow into the Mar contract is bearish. Next weekΆs export sales are again likely to resemble those for the week ending Dec 24.
Happy New Year!
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
