The soon to be history ICE Dec 15 contract gave up 166 points this week, settling a single point off its intraweek low at 61.66. The long standing Dec-Mar inversion gave way to partial carry this week as index funds rolled out of long positions and bull spreads were unwound.
By this time next week, at the latest, Mar will be the ICE lead month. ICEΆs newly minted world contract was not exciting to watch this week, with the May contract trading a 159 point range and settling just three points off its low at 70.43 on volume of around 100 lots per day.
The market received a pleasant surprise on Thursday in the form of total net export sales and shipments for the week ending Oct 29 in excess of 160K running bales each. This could stave off an official export projection reduction on the Nov WASDE report, especially if the production estimate is near unchanged vs Oct. Still, the market did not get excited following the reportΆs release; perhaps it was largely expected – although not by us. Nor did the market continue its break with many traders of the opinion (us included) that selling on strong US export business (especially at a level below where recent business has been concluded) is generally not something one wants to do.
The USDAΆs Nov WASDE report is slated for release on Tue, Nov 10 at 12:00 PM, EST.
The Nov US production estimate will likely be taken quite seriously by the trade as the margin of error should have narrowed significantly vs the last two months. We have US production right at 13M bales and aggregate world production and ending stocks lower vs Oct, but not by much.
At this time, I still think that 3M bales is likely the lower bound on US ending stocks, although I think the official estimate could very well move lower as the marketing year wears on.
The domestic spot market remains strong, with higher quality recaps (31-3-36+ and micronaire under 4.6) drawing a basis of 250-400 over December, but we are seeing only lukewarm selling from producers.
While we are sympathetic to the argument that even with a strong basis, 62 cents is “too cheap” to sell cotton, weΆre also familiar with more typical harvest bases of 250-400 under Dec. Once again, we recommend selling spot cotton on rallies over 6300 and/or with basis better than 300 over Dec. If the long hoped for rally to 6800+ ever does emerge, it will be a fine time to take profits on those May or July call options you bought when you sold your cotton!
For next week the standard weekly technical analysis for and money flow into the Dec contract is bearish, but the market has once again become oversold. Should bullish data be released next week, there are likely plenty of short-term sellers north of 63.00.
Both the Oklahoma State Cowboys and the University of Memphis Tigers remain undefeated this season in college football, and I will likely mention this every week for the rest of this season unless, of course, they lose. In fact, all four of my teams were winners last week – even the Razorbacks.
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
