The bulls took a break this week with the ICE July and Dec contracts giving back 46 and 34 points on the week, respectively. The July – Dec straddle finished the week at a 425 point inversion, down just slightly from last Friday.
The USDA’s latest export sales figures remained well ahead of the weekly pace required to meet the USDAΆs 14M bale (480s) export target, but were also noticeably off W/W. Total net sales for the period were approximately 121K running bales, with shipments at nearly 318K running bales. Sales cancellations were significant at 27K running bales, with South Korea logging 12K. Total sales against the upcoming MY were also notably lower W/W at nearly 73K RBs.
The fact that Korea accounted for nearly 50% of the sales periodΆs cancellations could certainly be linked to political tensions within the region. Should the current situation escalate, we think that it is likely that larger and broader (geographically) cancellations would likely ensue.
The most obvious effect of slowing US export sales (and particularly shipments) is that the USDA could put off another enhancement to its export projection which, at least until now, has been largely expected. Hence, market participants will likely pay close attention to next weekΆs US export report. However, with the May WASDE report release slated for Wednesday, May 10, the USDA will be privy to figures to be put forth in the export report scheduled for release on Thursday, May 11. And, this could certainly affect any prognostications that are put forth in the WASDE balance sheets.
Internationally, reports out of most cotton producing regions Down Under have been most favorable with respect to both yield and quality. This should serve to increase pressure on US export figures over the near- to medium-term. The Chinese Ministry of Agriculture has publicly agreed with US pundits in that it expects cotton to increase dramatically by 2020. The Ag Ministry offered up a ballpark figure of approximately 11M bales. However, one should note the relationships that China has developed or is developing with cotton producing nations within the African Franc Zone and Syria, which could ultimately serve to subdue export demand from the US.
Wet weather in the US has hampered sowing progress across many areas within The Belt this week. This is especially true for the Mississippi River Delta. Here in the northern half of the region, rainfall was heavy late this week with severe storms and flooding predicted over the weekend. However, it is early and the medium-range forecast is for favorable planting weather following the first of May.
A ray of hope this week for US Ag producers of nearly every ilk was the tentative agreement by the Trump administration with the governments of both Canada and Mexico to attempt a re-negotiation of NAFTA. Coupled with the confirmation of Sonny Perdue as Secretary of Agriculture and the naming of a task force on “Agriculture and Rural Prosperity,” there is hope that in addition to reducing the regulatory load on agriculture, the Trump administration could be adopting a somewhat more trade-friendly posture.
WeΆll continue to encourage producers to watch the Dec contract for any break above 75 cents, favoring puts over forward contracting given the uncertain weather outlook in many areas. While a bird in the hand is worth more than the prospect of a simultaneous strong basis and rally in the summer, we believe a position hedged with puts and insurance might make for better sleep if the current wet pattern continues. That said, producers who have yet to contract cotton should give serious consideration to contracting a conservative 50% at the current profitable levels.
For next week, the standard weekly technical analysis for and money flow into the July contract remain bullish, with the marketΆs recent technically overbought condition having faded away.
Next week is a heavy economic report/data release week for the US, with the FedΆs interest rate decision dissemination scheduled for Wednesday. The heavy mill on-call position will likely continue to provide support for the July contract over the near- to medium-term with market spikes (which should be viewed as old crop selling opportunities) very possible. The July – Dec straddle continues to look like a “sell” at around 450.
And, as food for thought, when one gets ready to “pull the trigger” on either a futures or physical position one has essentially become – at least for a short time – a day trader. Thus, access to the most up to date information and market perspective is essential in making consistently profitable decisions.
Have a great weekend!
