Rose on Cotton: Win Some, Lose Some – WASDE Will Set the Tone
I recalled this week, on more than one occasion, my first intramural softball game as a college undergraduate (a few years back) in which I had to live down fanning out on three straight swings. It was a slow-pitch softball game, and I had been the lead-off batter. In my defense, it had been a number of years prior since I had even stepped on the field and I have never won any awards for by softball (or baseball) prowess.
The first paragraph was, of course, an analogy to my woefully wrong weekly directional call for the trading week that closed today. We had expected a weekly settlement near unchanged to possibly lower, which was pretty much 180 degrees from what actually happened.
We thought that the market would need to test 86.00 again in order to stir demand and fixations, and we expected a relatively poor export report for the week ending Feb 27, which actually turned out to be quite strong.
It began with the Russians showing up uninvited in Crimea. The grain markets moved higher with the threat of commodity flow interruptions, and cotton kept pace. All the while, the US dollar continued to trade near to and below the 80.00 level. The export report was, it seemed the final straw. Both shipments and net sales far exceeded the per week requirements to meet the USDA’s 10.5M bale export projection as well as the general expectations of the trade. The market meandered a bit before working higher, triggering stop orders along the way on Thursday, and did not stop until early this morning when it reached a new high for the current move of 93.35.
Trading was volatile this week on the front month, and this is unlikely to abate within the near future. The USDA will release its monthly WASDE report on Monday, Mar 10 at 12:00 PM, US EST, and any unexpected estimates will likely excite the market again. Bloomberg News released the results of their monthly survey (to which we contribute) which stated general expectations for US ending stocks to be projected at 2.84M bales, via a slight increase in the US export projection. Our estimate of the likely US ending stocks projection is 2.9M bales, but I will not be shocked if it is unchanged, once again. The world S&D is expected, on average, to remain largely unchanged, except, perhaps, for a modest reduction in the production projection, and we concur.
Looking forward, the front month will search for equilibrium in finding price levels at which sales and fixations can be accomplished, but that will also ensure sufficient US stocks to last until the new crop can begin being delivered. At this time, we do not believe that that level is at or above 93.00, but that may be coming.
Demand has followed the market higher over the current 1400 point (weekly) bull run, and the recent dip to near 86.00 was obviously more significant than any variation of sales period average price. And, as US production is likely to be ~200K bales less than the USDA’s current estimate, the market will need to push higher to ration demand.
Concerning Dec 14 (we called this one right) it should continue to move higher, given recent corn and soybean price movements and the persistent droughts in west Texas and California. We agree with the current consensus that planted acreage should be in the neighborhood of 11.3M acres.
The tone for the front month will likely be set by the WASDE release; the market seems to have been trading a US carry-out of 2.8M bales, or less, so, perhaps, the most bearish thing that could happen would be for the USDA to meet or exceed these expectations. A static ending stocks projection will likely be discounted. World aggregate ending stocks, outside of China, should also be heeded – especially if any portion of a reduction is attributable to India.
For the week, some of our proprietary analyses call for a W/W settlement gain, but at this time we think it will likely finish near unchanged to lower on volatile trading action while trading a range of 88.00 – 92.50 on the inside or 86.50 – 93.75 on the outside.
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Louis W Rose IV, PhD has worked with cotton as a producer, consultant, analyst and trader. Rose holds degrees in Education, Agriculture, Plant Science and Business (MBA) from AR St Univ, OK St Univ and the Univ of Memphis, respectively. He has held positions with Aon Reinsurance and Cargill Cotton. Rose currently provides analytic services for various clients and media outlets and is the co-founder of Risk Analytics, LLC, producers of The Rose Report, which he authors. For more info on The Rose Report or analytic services, please visit: www.rosecottonreport.com.