The ICE Mar contract gained 104 points on the week, settling at 62.45. The weekΆs tight 163 point trading range was set during the first day of business. The Dec contract picked up 28 points on the week, settling at 62.75. Aside from the early week challenge of the 63.00 level by the Mar contract and another brief run-up ahead of the US export report there was little excitement.
US export sales were slightly higher Vs the sales period ending Jan 7 at just above 200K total net running bales. While I have not been too concerned about the shipment pace thus far, the market will likely want to see some progress in this as we hit mid-Feb, at the latest.
In China, a 2016 import quota is reportedly being distributed among domestic mills while rumors abound that China will attempt to offload about 9.2M bales from its reserve while also procuring another 3.5M – 3.7M bales from its Xinjiang region. However, demand continues to be slow in China, with some mills reportedly closing their doors early ahead of the annual Spring Festival, which commences on Feb 9.
With respect to 2016 US acreage, we still maintain the market needs to encourage total (upland + ELS) US plantings at near 9.7M -10.35M acres, but, although we have not conducted analysis yet, I would guess that we are currently looking at the lower end of that range, at best.
ItΆs hard to base new producer strategies on a week with little or no market moving news. As we mentioned last week (and as we have seen similarly commented on elsewhere), it is important to realize the ICE futures are pricing strict low cotton while Asian mills (among others) are facing a relative shortage of middling and better grade cotton.
This means we need to look to the basis as much as futures for cues, and the basis continues to tell us that some merchants are still willing to pay a premium for premium cotton, but that the demand is not what it was just a few weeks ago.
Forward contracting basis remains historically strong, but lukewarm compared to the basis we were seeing this time last year. Until Chinese demand picks up, the dollar weakens, or June gets closer, it may be difficult to find a very aggressive forward contract. Given that, producers in areas that typically produce higher grade cotton shouldnΆt get in too much of a rush to contract cotton in the absence of a very favorable basis or bullish market move.
For next week the standard weekly technical analysis for and money flow into the Mar contract remain bearish, but less so than last week. Next weekΆs export sales are again likely to be supportive, but shipments need to pick up the pace. The current trading range is apt to endure until more definitive news is released from China.
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