Despite less than encouraging data put forth over the course of the week – amid continuing uncertainty from China – ICE cotton futures did quite well. May futures gained 148 points on the week as shorts covered positions and the nearby spread strengthened. Dec futures were a 91 point winner, settling at 58.26. May futures gained nearly 200 points in March while Dec gained 156 points on the month.
Neither the USDAΆs planting intentions nor the latest US export sales data were bullish, with planting intentions of 9.56M acres and less than 100K running bales disseminated yesterday. Export shipments also continue to refuse to get on pace with the USDAΆs prognostication.
These bearish factors proved to be minor considerations on Thursday, however, with front month futures rebounding nearly 160 points off their lows during the second half of the dayΆs trading action. This upward movement continued in strong fashion on Friday as shorts apparently continued to cover positions.
I was incorrect with respect to the intentions of US producers – at least during the first half of March. The USDAΆs acreage projection was around 300K acres above the upper end of the range I predicted. It was also well ahead of the expectation of most published analysts.
Still, soybean prices over the last two weeks will likely continue to compete with 2016 cotton acreage. I am joined on the low side of acreage expectations by analysts at Rabobank. A statement posted by the international financier said that a “US planted area of 8.8M acres seems more reasonable…” IΆm not that bearish on acreage, but itΆs hard to ignore RabobankΆs reputation and resources.
With the USDAΆs planting intentions number now known, the market will likely begin to respond to the weather as it awaits more details from China on the release of its reserve stocks. With old crop prices at current levels, we could see a spike in demand once terms in China are made known to the industry. Additionally, traders will now look ahead to the USDAΆs May WASDE report release, which will contain the first official 2016/17 marketing year balance sheets. Much calculation will be done over the coming days employing historical yield and abandonment against the USDAΆs acreage prediction, which will serve as the figure used in all analyses the USDA conducts until the June 30th acreage report is put forth.
While we had hoped the planting intentions report might give bullish producers a hook to hang their hats on, it looks like the best opportunity for attractive forward contracting offers in the near term will come in response to the aforementioned Chinese information. In addition to the “sell the rumor, buy the fact” argument, the predicted wet and stormy spring could inspire more aggressive buying strategies over the next 8-10 weeks.
When we look at current forward contracting offers, we see a fairly limited downside risk compared to the upside potential. Combined with a potential for prevented planting due to weather, we believe that booking ¼ to 1/3 of estimated production on rallies into the low-mid 60s is as aggressive as we would get.
For next week, the standard weekly technical analysis for and money flow into the Mar contract remain bearish. Various index fund rolls will continue, with the Goldman roll commencing on April 7, as the market continues to await news from China and ponders the USDAΆs next WASDE release on May 12.
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
