Despite a week of bearish domestic news and the lack of a need to add significant weather premium against the US crop, ICE cotton futures performed admirably. Dec gained 82, 57 and 78 points on the day, week and month, respectively as the Dec – Mar spread strengthened.
We are now 0 for 2 this year in predicting US planted acreage. We’re in good company, however. The USDAΆs June 30 acreage report revealed planted acres at just above 10M total acres (9.82M upland) and was more than 500K acres above the average published analyst and trader expectations and 250K above the highest estimate.
Export sales for the week ending June 23 were fair but shipments were strong. Still, the market is suggesting that new sales at ICE futures prices much above 64.00, basis Dec, are difficult to accomplish. On the other hand, overall demand seems to be improving as China continues to sell nearly 100% of its daily offerings, with mills reportedly calling for larger daily quantities to be offered.
Internationally, the market continues to add premium for an aggregate world crop that seems to be getting smaller. Smaller estimates of planted acreage in China, India, Pakistan, combined with droughty conditions across W Africa and the FSU and less than desirable weather across China have many analysts thinking the crop will continue to get smaller month by month. Too, AustraliaΆs aquifers need recharging ahead of the autumn planting season while the current soybean – cotton price relationship will likely entice smaller first crop cotton acreage in Brazil.
However, the USDA balance sheet continues to loosen. Improving weather across much of The Belt, combined with an estimated US planted area of just above 10M acres, are likely to keep pressure on ICE futures. It is an axiom that the US domestic crop affects ICE futures disproportionately to the aggregate world balance sheet.
Many producers were looking to the June 30 report in hopes of a rally in either basis or futures, and clearly they didnΆt get that news. If there is a silver lining in the planted acre numbers, it is that extra acres will be a much needed shot in the arm for several segments of the industry, notably the ginning sector. In the long run, a healthy infrastructure is key to maintaining the profitability of US cotton.
Hence, we think that a breakout above the 67.00 – 68.00 area is unlikelyover the near-term, and downside protection, at least to some extent, should be exercised on rallies challenging recent market highs. If weather conditions improve across the world and/or demand proves to be stagnant or contracting from currently estimated targets, ICE futures could be headed below the 60.00 level when the US harvest season approaches.
For the time being, our advice to producers is to watch for opportunities to buy puts on rallies, grow/pick/gin for quality, and stay in close touch with their local buyer.
For next week, the standard weekly technical analysis for and money flow into the Dec contract remain bullish. Export sales for the week ending June 30 are likely to resemble those put forth this week. We would feel better about the cotton marketΆs ability to hold its head above water this week if it were not for the long holiday weekend. Spec selling/long liquidation could ensue next week.
The markets will be closed until the evening of July 4 as we commemorate and celebrate the birthday of our great nation and rights and freedoms such as due process, presumed innocence and absence of double jeopardy in our courts, and the right to keep and bear arms among many others not afforded to the majority of the worldΆs population. We continue to reap the benefits from the foresight of the long-haired, free thinking radical rock stars of their day that set this thing in motion. Despite news headlines that are often dour, I think we can all agree that this is still the finest place in the world to call home.
Have safe, happy and very enjoyable holiday weekend!
