Rose on Cotton: Uptrend Continues at Least Until Cotton Up, Weather Improves
The front month again moved higher, gaining 107 points on the week and 235 points since April Fool’s Day. Dec gained 123 and 444 points for the same time parameters.
Economic data for the US took a negative tone this week. Q/Q GDP growth was reported at just above flat and jobless claims data was discouraging, despite a drop in the unemployment rate. We interpret this to mean that there is a significant population that has either exhausted their benefits or is now “under-employed”, while the sum total of those who are either without work or are employed below their education, skills and abilities is actually growing. Predictably, the dollar took a hit relative to other currencies, making US cotton more attractive on the export market than the futures would imply.
Despite this, demand for US cotton was off significantly this week with net sales just below the weekly pace needed to meet the USDA’s current export projection. Still, the market worked higher. We expect this to be the case until a significantly negative export report is released. China, by far, remains the largest taker of US cotton over recent weeks and likely serves as the primary reason that futures have not retraced to test the 90.00 level, or lower.
Next week’s report load will be lighter, but will likely carry more weight than this week’s as the May WASDE report (which will feature the USDA’s first official balance sheet estimates for the 2014/15 MY) will be released on Friday, May 9.
The National Cotton Council (NCC) has reduced its estimate of 2014 US production from 16.4M to 15.25M bales while the International Cotton Advisory Committee has further reduced its estimate of production in China such that India is expected to be the world’s largest producer of cotton in the coming MY.
We are in agreement with the NCC on production, with our estimate of 2014 US production (as reported by the USDA) at 15.1M bales with a projected carryout of 3.4M bales and exports for 2014/15 at 10.5M bales. WRT world numbers, we expect reductions in production, consumption and ending stocks from the USDA’s preliminary Feb estimates (disseminated at the annual Ag Outlook Forum) of 117M, 113M and 100M bales, respectively. Respectively, our estimates are 115.5M, 112.75M and 99.9M bales.
Unless we see a US export report with flat to negative net sales on Thu, May 8, we expect the USDA’s 2013/14 US S&D to remain essentially unchanged.
We also do not expect major changes to the world balance sheet for the current MY – however, given that it is May, which means the addition of the coming MY, significant “backward revisions” to previous MYs is quite possible. We are making no attempt to either predict the likelihood of or estimate the magnitude of such revisions, should they occur.
Fundamentally, the front month will likely continue to struggle with new demand while the on-call sales position will likely continue to provide support below the current market. The commitments of traders report relays a small decrease in the cumulative speculative futures only net long position while also evincing a 7.4% increase in futures and options combined net long position held by these entities. The resulting implied option position suggests, to us at least, that the speculative sector is growing somewhat wary of the sustainability of July futures near their current level.
For Dec, until rain-parched West Texas sees significant rainfall (with the prospects of continued precipitation) and good stands are achieved elsewhere in the US, the current uptrend is likely to continue. Even with normal spring precipitation, it is unlikely West Texas will produce normal yields, given the existing water deficit.
On a weekly basis, both July and Dec are somewhat overbought, but the overall analysis remains bullish for both. Fundamentally, we believe that the front month will tire before Dec does. Further, we would expect July to hold greater potential for near-term moves lower vs higher, while we think that the opposite is true for Dec.
This is a challenging week to predict in that traders must assay the effects an export report that will likely struggle to meet pace requirements for the USDA’s current projection against a WASDE report that has more bullish potential than bearish.
For the week, our directional call is conditional, in that if the US and world S&D balance sheet is largely unchanged for 2013/14 and if US ending stocks are estimated to be near to or less than 3.3M bales, we expect the market to finish near unchanged to higher. Else, we would expect near unchanged to somewhat lower while trading a range of 92.25 – 96.00 on the inside or 90.00 – 97.50 on the outside.
For Dec, we expect near unchanged to higher while trading a range of 82.00 – 84.90 on the inside or 81.50 – 85.50 on the outside.
Finally, ICE Futures group announced this week that it will launch its world cotton contract during Q4 of this year. Initially, we expect little loss of volume to the benchmark ICE contracts, primarily because there will be a lack of historic data from which speculators can conduct analyses. Overall, the contract should provide a useful, real-time resource (to augment the A-Index) by which the relative value of US cotton can be elucidated.
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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.
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,