It was another long week in the cotton market. Concerns about China potentially offering their reserve stocks at bargain basement pricing and fund liquidation trumped tight domestic and “World Less China” balance sheets, a crashing US dollar and very strong export data en route to the spot month trading (and settling) south of 60.00. Dec fared better, only giving up a single point on the week.
The US producer had to settle for the consolation prize of now being able to use commodity certificates to redeem loan cotton. The larger prize of cotton being added to the oilseed crops list was lost when Secretary Vilsack announced that he believed he lacked the power to make such become a reality.
I would guess that if the Secretary happened by either this weekend’s National Cotton Council (NCC) annual meeting in Dallas, or the upcoming Mid-South Farm and Gin Show in Memphis and wanted to refresh himself with a cool or invigorating beverage, he would likely have to fend for himself at the cash bar.
I had actually planned to rake the former Iowa governor over the coals a bit this week, if not roast him outright, but I decided that I would not want anyone jabbing at me without first getting their facts straight. Hence, I did some research on Mr. Vilsack only to learn that his is quite the success story. The Secretary began his life in an orphanage in Pennsylvania steel country but he has thus far made it to the Cabinet table, earning undergraduate and law degrees, and serving as a mayor, state senator and governor along the way.
It seems that he began life with greater obstacles than did I, but it looks as if he has accomplished more than I have. Of course, this does not mean that I agree with his decision. Although I probably wouldnΆt pony up for a beer with him today, IΆm just not going to take any pot shots.
It has been a busy week and the pace will not lighten anytime soon. The NCC will release the results of its annual planting intentions survey tomorrow. I stated here last week, that I thought that the results would likely be a bit higher than last year (probably within reach to either side of 9.5M total acres), but that I would not be shocked if the results tallied not much more than 9M. Whatever the result, I now suspect that the number will prove to be a bit northward of what actually occurs in a few months.
The USDAΆs Feb WASDE report will be released on Tue the 9th. The world balance sheet should tighten further with production debits likely to outweigh those on the demand side. With respect to the US, it would be highly irregular for the USDA to change the US production projection ahead of the yearΆs final ginning report – and only then if it differs significantly from the Jan projection. Else, USDA-NASS will produce the final tally in May. And, I think that recent export data has been more than sufficient to ward off a reduction in the export projection.
Voodoo math season has started in the country. It is no secret that the past few years have been rough on the gin sector, and many gins are salivating at the prospect of increased cotton acres for 2016. So the coffee shops are full of forward contracting offers that seemingly defy logic or economics (the aforementioned voodoo math).
Producers should remind themselves of the fact that forward contracting prices are competitive across the board and it is unlikely that any given merchant is going to offer much more than 50-100 pts more for new crop than any other merchant.
If gins are offering prices that are 5 or 10 cents better than the gin down the road, it is far more likely that they are simply including warehouse or seed rebates in the price they are quoting, or they are quoting a price that doesnΆt include charges or fees.
There are differences between gins and merchants, but these differences typically show themselves in service and contract terms, warehouse charges or small variations in the basis. If you are comparing prices between gins or merchants, be sure you are comparing net price to net price, and that you understand what the implications of your contract are for rebates, premiums, discounts, and charges.
For next week the standard weekly technical analysis for and money flow into the Mar contract is bearish, but, before the week is out, we will be switching to the May contract as the de facto spot month. Next weekΆs export sales are again likely to be supportive; ditto for the WASDE report. We think that cotton futures are just too cheap, but it may take stabilizing news on ChinaΆs release policy to propel this market higher.
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
