Rose On Cotton: December Contract Continues To Stall In Shutdown, Lack Of Info
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We suspected, prior to noon, CST, last Friday that Dec 13 bulls had some questions as to the destructive power that tropical storm Karen and typhoon Fitbow were actually packing.
The market did not close as strongly as many (we included) would have suspected – although there was the considerable issue of the US government in shutdown mode and the associated indefinite interruption of information flow from the USDA and its agencies to consider as well.
In the case of Fitbow, which was this time last week approaching China’s eastern shore, the answer to those questions was “not much” with respect to this season’s cotton production. Regarding Karen, the answer was “hardly any”. All of her tropical status had been stripped away before she reached the shoreline.
Yes, there was some unwelcome rain, but experts within the major production regions of the southeastern states were quick to tell us that very little open cotton was to be adversely affected with respect to either yield or quality. And then, for the most part across major cotton producing areas of the US (and for most of the cotton producing world as well) a breakout of beautiful weather occurred.
Dec13 responded accordingly and quickly on the open Sunday evening, gapping 6 points lower to 87.12 (the high for this week) and then off 169 points in less than a minute. The 86.50 level was as close as Dec 13 ever came to filling the gap on Monday, or ant of the following days this week. Dec 13 gave up 316 points Monday, but that was to be the worst of it – so far.
And yet, it was not a breakaway. The 83.10 level held staunchly as a stopping point this week as mills fixed on-call sales against Dec 13 and new inquiries picked up and physical business was conducted. The weekly chart is now consolidated once again; Dec 13 has given up 71 points in the 7 weeks since the collapse of the rally to nearly 94.00 and is currently trading in the middle of the 30-week regression channel.
No USDA reports were disseminated this week, nor have any dates been set for their release in either the near or extended future, which left speculators with only the prognostications of private analytical firms, foreign governments and their own resources to consider as to how to best manage their positions.
From viewing the daily data it would appear that their decision, at least in part, was to roll some of the Dec 13 early and buy Mar 14. And, with the bear spreading, the Dec 13 – Mar 14 inversion disappeared and the spread, while not nearly at full carry level, has grown wider each day this week.
Traders will be expecting another week of information deprivation, but there was some information released this week that we have no doubt speculators will use over the weekend to at least frame their strategies for next week.
Over the course of this week both Informa Economics and Plexus Cotton disseminated estimates of US production ranging from 600K – 875K higher than the latest USDA published number (12.9M). The China Cotton Association now estimates that cotton production in China last year was at 35.4M bales, which constitutes a 6.2% increase with respect to their most recent estimate and a 400K bale increase over the last published USDA estimate of cotton production in China for the 2012/13 MY.
It is our thinking that USDA will most likely adopt this number as their own on the next WASDE release. Certificated stocks increased this week to over 20K bales, and they will probably reach above 50K during the coming week. US initial unemployment claims came in much higher than expected, and the International Monetary Fund and the World Bank both significantly reduced their estimates of economic growth in China, the US and aggregated developing nations in Southeast Asia. And, the economic woes of the EU do not seem to be improving markedly.
These areas of the world tend to affect the world’s annual consumption of raw cotton disproportionately to the balance of the globe. Hence, we do not view this, or any of the topics discussed in this paragraph positively.
Add to this potential export woes as a result of USDA-APHIS not being able to issue phytosanitary certifications and the possibility of a government debt default on Oct 17 (and the most likely subsequent credit rating downgrade, should this occur), should the government remain largely on furlough for another week, and the picture is a bit bleak for Dec 13.
On the positive side, there are still fixations, we think, being done against Dec 13, and some new physical business will most likely be conducted; the US Dollar Index continuing to trade near the 80.00 level will help. And, we suspect that speculators have a generally supportive view of the world supply and demand situation by virtue of a likely shortfall in production in China. Should the government reopen and verify these notions on a belated WASDE release, Dec 13 could very well head northward again, but it is worth mentioning that we did not establish a long position on today’s close because we think that this is very likely to occur.
For next week, if the USDA remains closed, the best call would be for a trading range of 83.00 – 86.00 on the inside and 81.50 – 86.00, if speculators liquidate Dec 13 in an orderly manner. If not, 80.00 or below could occur. If the government reopens and begins to publish reports expeditiously, there could be considerable volatility to the upside, perhaps enough to fill that first overhead gap at 87.12 – 87.18.
Born and raised on a cotton farm in Northeast Arkansas, Louis Rose has been involved in cotton his entire life. Spending summers working his family’s fields, he got hands on experience with every phase of cotton production from planting to harvest. As an undergraduate at Arkansas State University, he worked as a scout for the University of Arkansas extension service and eventually launched his own scouting and consulting firm, which operated until 2000.
In 2005, Rose received his PhD in Plant Science, with emphasis areas of genetics and statistics, from Oklahoma State University in Stillwater, OK.
Rose also branched out into other aspects of the industry, becoming a partner in the family auction and implement business and working as the senior Agricultural Statistician for Aon Reinsurance in Chicago, IL. In 2010, he accepted the position of Global Cotton Analyst with Cargill Cotton in Memphis, TN, conducting daily analyses, building supply and demand models, and developing predictive statistical models for the merchant. Rose completed an MBA in Global Management in 2012 from the University of Memphis in Memphis, TN.In addition to writing the Rose Report, Rose providies analytic services to a variety of clients and media outlets. For more information on the Rose Report or analytic services, please visit: www.rosecottonreport.com
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,