The Mar contract picked up 77 points on the week, settling at 73.04. Spreads weakened over the course of the week, but the July – Dec spread remains heavily inverted at greater than 200 points of negative carry. The Dec 2017 contract finished the week at 71.19.
Demand for US bales for export continues to dazzle. Total net export sales for the week ending Jan 12 were nearly 355K running bales, with sales distributed across the board. Seconds after the reportΆs release the market jumped northward to 73.43, but then spent the majority of the dayΆs remainder in a band on either side of 73.00.
We found sales data released to today to be surprising strong, and we doubt that weΆre alone in this matter. To be certain, the pace of export shipments has improved since dearly Dec, but in only one sales period since Aug 1 has the US met the weekly pace required to export 12.5M bales by July 31. Shipments for the most recent period were the equivalent of about 248K 480lb bales, nearly 17K bales off the mark.
Sales over the period culminating Jan 12 were accomplished at a volume weighted average price of nearly 73.30 Vs the previous periodΆs 73.10 and at an intraweek low nearly 200 points higher than the period ending Jan 5.
However, Jan 12 was the same day that bearish data was released via the USDAΆs Jan WASDE report and it seems likely, given significantly lower projections for both aggregate world supply and demand, that mills have since re-thought the levels at which they should purchase additional stocks. The modest, but steady, increase in certificated stocks since Jan 12 and the weakening of the nearby spread seem to support this notion.
On the whole, over the course of the week it looked as if rallies above the 73.00 level were viewed by the specs as opportunities to trim their heavy net long futures position.
Producers holding old crop have seen a minor tightening of the spot basis this past week, and spot sales have responded accordingly. In our opinion it is hard to make an argument for holding old crop much more than a few more weeks, given the low likelihood of a major rally and the certainty of storage and interest charges. As always, firm offers with your broker are the soundest strategy, particularly when combined with a realistic understanding of the calendar.
New crop is another story.
The Dec 17 contract has recently expanded the upside of the 68.00 to 71.00 channel that has contained most trading since September, but only slightly. The tight trading range of the past three weeks belies the uncertainty that hangs over the 2017 crop. Events in Washington promise to have a profound impact on the spot trade this year, and the new administration is giving anything but clear signals on a variety of issues.
If confirmed, Sonny Perdue looks to be a promising Secretary of Agriculture, but there are still more unknowns than knowns wrt to trade relations and the predictability of the USDA this coming year.
At this point, we believe time is on producersΆ side, and that while at the money puts are always a wise investment, there is little reason to get in a hurry to forward contract cotton.
For next week, the standard weekly technical analysis for and money flow into the Mar contract remain supportive. Data suggest that US net export sales for the week ending Jan 19 are likely to be off Vs figures put forth this week, but the data suggested the same thing last week.
Have a great weekend!
