Dec cotton posted the best performance it has in quite some time this week, gaining 369 points W/W while seriously violating the technical downtrend and finishing near its weekly high. Among the “ags” cotton was in a class by itself this week, with corn, soybean and CME wheat each posting woeful performances while posting fresh intraday contract lows on more days this week than not.
The US cotton S&D looks a bit different than it did in the minds of most at this time last week. Nobody publicly called US production off a cool million bales – back down to the 16.5M of two months hence. A few thought that US ending stocks could fall as low as 5.2M bales, but nobody guessed how it would occur – via 1m bales less production, 150K less C/I and 700K less bales of projected exports amid tepid world demand and seemingly ever-increasing production.
US production was reduced on lowered planted acreage (as crop insurance data has suggested recently), significantly lower projected yield, and a touch more abandonment.
To me, the report was bearish – all the way around, with the exception of the 150K bale reduction in 2014/15 C/I that inspired fevered purchasing of the Dec – Mar spread. The market generally expected 200K bales less US C/O; they got 400K less, which is no great concern, except for the fact that it just wasnΆt pretty. A C/O of 5.2M bales in the US is formidable, much more than we have grown accustomed to of late and that also matches the projected US new crop C/O put forth on the July WASDE report.
Between the July and Aug WASDE report releases Dec had an average settlement value of 65.83 and traded a range of 62.02 – 69.14. And we sold cotton all along that slide. Over the past two weeks the US has averaged a mere 25K RBs per week. Regardless of the mismatch of currencies with those that compose the US Dollar Index, when the index runs high, US exports often run short.
One would expect that sales against the deferred months, when cotton is expected to be plentiful, could be accomplished at current prices. But the on-call report says that this is not the case.
World C/O is now projected at a record 106.29M bales with 118M bales of production measured against just over 112M bales of consumption, off nearly 500K bales M/M. World C/O outside of China is now projected at 43.38M bales (S/U ratio of 57.4%), and this is bearish.
Further, the USDA has yet to raise projected production in either China or Pakistan, but published reports and surveys suggest that this remains a distinct possibility. World production likely has the potential to reach 120M bales this year – 119M bales is not a stretch.
Looking forward, next week will be busy with releases of economic data; monetary policy announcements are also scheduled for release. The immediate effect of positive data is likely continued strength in US currency, which is not positive for our market. Given the price structure over the most recent sales period, export sales are not likely to be robust, but may very well surpass this weekΆs abysmal performance.
When considering the likely distribution of spreading activity, managed money firms remained long Dec while also continuing to sell volatility for the week ending Sept 9; under the same considerations the aggregate non-commercial sector was nearly flat Dec futures. Little fresh physical business or mill fixation is likely at current price levels, although producers have begun to fix some of their on-call commitments. We expect this to continue and to provide strong resistance if prices attempt a move higher. Dec struggled on better than decent volume today above the 68.00 mark, and this should continue.
Technically, the weekly picture is more positive than it has been in some time, with the marketΆs oversold condition having all but evaporated. Gaps still remain below the current market at 63.84 – 63.88 and 63.37 – 63.46 and above the market at 66.45 – 66.57, 67.44 – 67.46 and 77.80 – 78.00; the lower gaps should be viewed as downside targets.
Still, fundamental factors will likely become the driving force at current price levels, and this causes us to hold a downward bias for the week. We calculate a 2 in 3 chance for a lower settlement next Friday with odds favoring breaks vs rallies.
The Rose Report weekly edition is published and made available free of charge as a courtesy to producers, ginners, merchants, agents and all others who have an interest in the cotton market. To obtain a free trial of the more comprehensive and up-to-date Rose Report daily edition or to learn more about our other cotton analyses and analytic services please visit: http://www.rosecottonreport.com/.
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.
