The ICE Dec and Mar contracts gave back 160 and 87 points on the week, respectively, as last week’s inversion between the two contracts gave way to partial carry. Well,
Johnson On Cotton: Bumping Up Acreage Intentions, But By How Much?
USDA’s National Agricultural Statistical Service will issue the results of its crop planting intentions survey on Thursday, March 28, at noon eastern daylight time.
The recent price rise in cotton has helped to move the expected planting area up from earlier expectations projected by the National Cotton Council and USDA’s Outlook Conference.
Tentatively, trade expectations are for a figure ranging 9.8 to 10.4 mln acres.
My projection for next week’s planting intentions by NASS is 10.055 mln acres, slightly higher than my previous of 9.9 mln acres. NASS ran their survey from February 27 to March 19, so some of the recent increase in cotton prices should be reflected in their numbers vs the NCC survey which was taken at the end of 2012.
However, the full effect on cotton area from the gains in the December contract and continued drought across the Southwest will not be known until the June 30 planting report is out. I expect area from the SE, Delta and Far West to be higher than the next report’s suggests, so a final figure approaching 10.5 mln, if not a bit more, is likely.
How much above 10.5 mln acres we’ll likely see does, in fact, partly hinge on the ongoing drought in Texas. NOAA’s latest 30- and 90-day forecasst do not bode well for any improvement to the drought, which is likely to drive cotton acres higher across the High Plains. Since cotton prices moved higher in the past several weeks relative to static or falling soybean/corn prices, we could have an acreage surprise, but my contacts indicate any substantial increase will occur later in the planting report.
Other points to keep in mind:
- Some rotation of crops has to occur each year which may or may not benefit cotton to ensure soil health and protection against some insects/diseases and to benefit yields the following year.
- Bankers still exercise some control over producers’ choices and they may not be as enamored with cotton prices and their direction as farmers are.
- The December was around 83 cents when the USDA Outlook Conference was held, prompting many traders to project huge jumps in cotton area involving as most as a mln acres increase due to the 10-cent rise in the past month. There will be an increase as discussed above but some of the talk is a bit exaggerated. Since February 22, corn has also risen 51 cents in the nearby and nearly 20 cents in new crop. Soybeans have not fared as well, with old crop off 23 cts with November up 13 cts.
If the December cotton regains its legs and moves above 90 cents, more acres will be added but this week’s performance has dimmed those prospects. Regardless of whether cotton area per producers’ intentions is at 9.8 mln or much higher at 10.5 mln acres, they will be higher than the dismal numbers from 2008 and 2009.
Planted area is the first piece of the puzzle, but the drought across the middle part of the country will result in much higher abandonment of various crops, especially cotton in the SW region.
US harvested area will be far more important in dictating production in 2013/14.
PRICE IMPACT/CONCLUSIONS: The bulls have suffered this week with the front month dropping 6 cents or 25% of its gains over the past 4 months with new crop losing just over 2 cents or 14% since mid-Nov 2012.
Since this rally began, every break in old crop has not been more than 25% and most falling short of that amount. There are far more reasons for prices to break than not break including an extremely overbought status, nearly continuously buying by specs for the past 4 months and mill resistance to ever higher prices.
Of course, there is also a tendency for prices to ease off once the NASS surveys are finished as their job of raising acres is completed. On the flip side, there has been and still is latent demand for cotton by way of mill buying just below major support levels.
Plus, the shrinking supply of available cotton from major exporters such as the India, US, AFZ, CIS and Australia continuous to get smaller as more sales are made week to week.
This week’s price break has had some talking of possible export cancellations but only 560K bales (5,600 contracts) were bought in the past 3 weeks from a low of 82 cents to last week’s high of 94 cents. Since the last 6 cent rise occurred this past week, 70% of the 560K bales occurred in the 82- 88 cent range vs this week’s low of 87.47 (and counting).
Cancellations are always a concern but from a pricing perspective, values have not dropped nearly enough to solicit that type of action on the part of foreign buyers.
One other point: the most recent on-call report (as of Friday, March 15) shows there are net 12,107 contracts in the May to be priced by mills.
That means even if nearly every bale bought the past 3 weeks was cancelled, there are still more than double that amount to be priced over the next month.
Next Wed/Thurs, Mar 27/28th mark the last two days of the month and the quarter so whatever adjustments specs have made to their position this week, we could see more book-squaring next week whether that means more profit taking or utilizing options to protect those profits.
With futures having closed below their collective 10-day moving averages, prices could work lower but support can be found nearly every 100-150 pts down.
For instance, the 20-day moving average is 87.32 with the 38% retracement in May at 85.33. The 50-day moving average is 83.74 and a 50% retracement is 82.50.
As mentioned several weeks ago, in 4 of the past 10 years, old crop futures topped out in either March or April. In two of those years, prices topped out in July but in those two instances, there was a squeeze in the July contract via deliveries. Hence, putting aside any tops due to delivery actions, 50% of the past 10 years have seen rallies end in March or April.
That certainly ratchets up the potential for prices to have reached a major top.
However, since the cotton market does not ring a bell for us to know, the size of the break and how well (or not) it recovers will be a clear signal if a top is in place. Since next week should be slow due to Thurs’ Planting Intentions report and the upcoming 3-day holiday, we may have to wait for the opening days of April for a definitive answer.
Sharon C Johnson, ©2013. The information contained in this report is taken from sources we believe to be reliable but is not guaranteed by us as to accuracy or completeness and is sent to you for information purposes only.
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