Dec gained 14 points this week to settle at 64.35 while trading an anemic 198 point range. Dec has traded a range of less than 400 points over the last 3 weeks. Corn posted a respectable weekly close while soybeans continue to succumb to the likelihood a record US crop, closing in excess of 30 cents off W/W.
The USDAΆs monthly take on both the world and U.S. S&D was considered to be more bearish than not. Some have voiced opinions otherwise, but I think that we can all agree that the latest USDA projections are not bullish. Despite the formidable increase to projected US ending stocks, some attempted to take solace in the respective 600K and 700K bale reductions to the world and “world outside of China” projected ending stocks. Still, the numbers are bearish. And, while we were pleased to see USDAΆs consumption projection move northward and closer to ours, current demand relative to the current world supply of cotton will likely only support prices, rather than propel them higher.
The results of this seasonΆs first objective yield survey (OYS) placed total US production at 17.5M bales, well above all published analyst and trade expectations, including our own 16.9M bale estimate. Dryness in TX since the beginning of the OYS on July 21 was argued in some circles; we cannot disagree with this point. Yet, it seems very likely that abandonment for this season will be far below normal, especially in TX.
Thus far, USDA-FAS has reported a total of 10.58M planted acres of cotton this season, on which a negligible 138K acres of prevented planting claims were filed. Although these numbers will be adjusted throughout the remainder of this season it seems quite possible that mid-southern acreage will be off a bit, while TX acreage will be greater. ELS acreage, per USDA-RMA insurance data should move at least 100K acres higher vs the current USDA projection.
Still, less planted acreage or no, the insurance data suggest that most of it will be harvested. To date, the total loss ratio (indemnity/premium) of all US cotton is at 18%; it is currently 25% for TX (a state that averages a loss ratio of just above 100%) and 1% for all upland cotton outside of TX. These are not claims numbers that are telling of a crop with a multitude of issues.
Basically, we are not at all certain that the projection of 17.5M bales is very far off of line.
Looking forward, there continue to be supportive factors. The US has sold 1.42M bales of cotton against the current MY over the last 6 weeks; total commitments now stand at approximately 43% of the USDAΆs revised export target of 10.7M bales. And the US continues to sell cotton; gaps higher on the last 3 opening bells belie hedging of cotton that was sold post the marketΆs close on the previous day.
Too, the CNCRC will stop auction sales from its reserve stockpile for an undisclosed amount of time, which may constrain availability of stocks to satisfy nearby demand over the near-term. Further, certificated stocks continue to dwindle amid current demand and the tightness of nearby stocks. Cotton futures in both India and China have either remained near unchanged or moved higher while world spot prices have firmed over the past week.
Export sales are likely to be again strong on next weekΆs export report.
Most of the other supportive factors that we could list are much more likely to be friendly to Dec 15.
On the negative side, US currency continues to strengthen, which will apply some drag to export sales. Such likely contributed to this past weekΆs decline in net sales.
Further, the aggregate speculative sector (as of Aug 5) increased their net short futures only position 2.1K contracts to 14.6K. They also held a net short futures and options combined position of 6.4K contracts vs 3.6K long last week, effectively cutting their implied option position in half to just over 8K contracts long.
The smart money knows that demand will likely only be a supportive factor, and with harvest season rapidly approaching, tremendous potential selling pressure from producers awaits overhead. While this market could spike, a strong rally is not likely in the near-term.
Technically, the analysis remains bearish, but some of the marketΆs oversold condition on a weekly basis has weakened. Money flow indicators, however, remain much oversold. Our proprietary analyses suggest that similar market structures have greater than a 7 in 10 chance of closing lower, but often modestly so W/W, while normally experiencing an increased level of volatility.
Directionally, weΆll call it near unchanged to somewhat lower for next week while trading a range of 62.50 – 66.00 on the inside or 61.50 – 67.00 on the outside.
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