For the third consecutive week ICE cotton futures finished within shouting distance of where they ended the previous week as the medium-term consolidation phase continues, although this week’s trading action was not devoid of volatility around the Oct WASDE report’s release.  The Dec contract gave up 32 points, settling at 68.62 while Mar gave back 13, weakening the Dec – Mar inversion to 46.

The much awaited and anticipated Oct WASDE report has come and gone, but it contained estimates and projections that were very close to the average estimates published by analysts over recent days, including ours.  US production, exports and ending stocks were projected lower Vs Sept at 20.12M, 14.5M and 5.8M bales, respectively.  Aggregate world ending stocks were projected slightly lower Vs Sept as was the expected carryout outside of China.  Despite tighter projections of US and world C/O, the latest figures remain bearish – neutral at best.  Still, demand remains the North Star, with the USDA boosting its expectation for 2017/18 world aggregate consumption 260K bales to 18.1M.

We believe that domestic consumption could rise a bit as well, and stands an excellent chance of moving significantly higher in 2018/19 MY with mills backed by foreign investment set to come on-line next year.  Arkansas is expected to join the ranks of cotton consuming states next year with the expected opening of a mill backed with investment from China.

Total net sales and shipments were essentially unchanged for the week ending Oct 5 Vs the previous sales period.  Sales remained ahead of the weekly pace required to hit the USDA’s downwardly revised export target.  In order to match the USDA’s target total net sales will need to average less than 150K running bales per week (so it will probably take reported sales of 175K – 200K per week in order to actually export 14.5M bales).  Export shipments need to average nearly 300K running bales per week in order for the USDA’s current mark to be realized.

It still seems to us that a strong export year is in the offing for the US, although we realize that we may need to revise our projection lower over the medium-term, and we will be closely monitoring the amount of carry in ICE futures as we consider doing so.

The “Who’s Who” of the cotton trade (except for us) gathered in Singapore last week to mull over most (if not all) things cotton.  Reports from and presentations proffered at the meeting suggest that many pundits believe that cotton futures must move lower in order to stimulate further demand and to also combat further fiber share losses to manmade products.  Some further noted the likelihood of increased export competition from this years’ robust world production.  But we see things a bit differently.

The market has already found support at and north of the 66.50 level, basis Dec, with continuing evidence of mill fixations of on-call commitments near 67.00 – 67.50. – and there are over 14M (480lb) bales remaining to be fixed against all active contract; nearly 3M bales against the Dec contract and in excess of 11M bales against active contracts within the current marketing` year.  Synthetic fiber quotes have been moving higher for some time now, with cotton’s fiber share having seemingly stabilized, at least for now.  Further, the value of US currency suggests that a dip below – or even relatively close to – the 60.00 level over the near- to medium-term seems suspect.

As for export competition, the USDA is much more optimistic regarding southern hemisphere production in 2017/18 than are most; with respect to the southern hemisphere the level of competition could very well be severely mitigated by another US crop of strong quality.  And thus far it has been most strong.

The harvest of the US crop continued to make excellent progress over the past week and remains ahead of the 5-year average. We now estimate that as much as 40% of the crop will be off the stalk by October 15. The recent USDA estimated yield now stands at 889 lbs. per harvested acre, which is outstanding considering the lateness of this year’s crop and the three hurricanes that have moved across key growing areas at or near harvest time.  USDA classing is increasing daily with 1.76 million bales classed to date reporting from 251 gins nationwide.  Thus far, quality has been good with 84% of the bales classed tenderable against ICE futures.

Producers with higher grades are seeing the widely anticipated strong spot basis for early recaps. We have seen spot cotton trading in the North Delta for a 300+ pt premium over Dec futures, and have heard of comparable basis being paid in the Southeast for long staple middlings.

Whether one views this as a short-term phenomenon or the expected range for the season depends on whether one believes the past several seasons are “the new normal”, or whether one sees the past few years as an aggregated outlier.  In the second case, we should see the basis weaken as more of the crop becomes available and contracted cotton enters the supply pipeline.

In either case, we are inclined to believe between now and the expiration of the Dec contract, 70 cents will be a very difficult level to break, and producers being offered a basis of +200 Dec or better would do well to sell cotton. As always, bullish sentiments are best expressed in the options pit.

For next week, the standard weekly technical analysis for and money flow into the Dec contract remain bearish.  It is an axiom that all consolidation phases are eventually broken and that the longer a consolidation phase endures, the more severe will be the ensuing break or rally; however, market fundamentals suggest to us that the current trading range could endure a while longer.

Have a great weekend!