Rose on Cotton: Prices May Slip More Next Week
Dec slipped another 279 points this week, slightly further south than what we had expected last Friday. Dec is down 1165 points over the past 8 weeks and 502 points over the last two weeks.
According to the USDA, US producers planted 11.369M acres in cotton this season. We missed this figure badly, but we had some company. Although most people within the industry that we speak to regularly concede the increase in GA, most also believe that the acreage estimate for the mid-southern states is 100K – 150K too high. Still, this is the number that the USDA will use in its estimates until the certified acreage reports allow for truing of the current estimate.
Old crop export sales now stand at nearly 11M bales while shipments are 94% of the USDA’s 10.5M bale export projection. The weekly pace of exports continues to exceed the requirement to hit the USDA’s former export target of 10.7M bales.
Net sales and shipments were up W/W, but new crop demand remains generally weak. Outside of India, cash prices have trended lower, which does not speak well of nearby demand.
Weather across cotton producing regions of the US has been generally favorable over the past week – dry in parts of Georgia, perhaps, and wet in the northern delta. Scattered showers continue to occur over Texas cotton fields. The eastern Carolinas are on-deck to potentially receive significant precipitation over the coming days.
Some relief from dry weather has occurred in portions of China, while the lack of a strong monsoon formation over India is a growing concern. Our contacts in India have confirmed that the situation on the ground is quite serious and could substantially decrease cotton plantings.
Next week is light on economic reports. Still, at this time, we would expect the US S&D balance sheet to loosen a bit more vs the May report. We do not expect, at this time, that the USDA will move its production estimate much beyond 16M bales (Informa Economics has put forth a revised US production estimate of 15.93M bales). And, while we expect US exports for 2014/15 to eventually move higher, we doubt that much, if any, addition will be made to this statistic on the upcoming report. The bottom line is likely higher US carryout for 2014/15. The market generally expects this and we believe has priced approximately 500K extra bales into 2014/15 ending stocks.
On the positive side, if monsoon rains and showers do not increase by late next week over India, the USDA may lower its Indian production projection. Further, India has increased its estimate of 2013/14 exports from 9M bales, in line with the USDA’s latest published projection, to 11.4M bales. It remains an open question as to whether the USDA will increase its estimate of current MY demand, whether it will reallocate the location of ending stocks, or do nothing at all. Further, production in both China and Australia could be taken slightly lower vs current projections, and US beginning stocks could also be lowered slightly.
Technically, Dec remains oversold and our proprietary analyses indicate that similar historic market structures have nearly a 2 in 3 chance of settling lower W/W.
For next week, our directional bias is conditioned on the USDA’s export and WASDE reports, but we are, in actuality, thinking that prices will slip a bit further. We do not expect Dec to challenge the overhead gap at 77.95 – 78.00 over the coming week. We expect the market to trade a range of 70.50 – 74.30 on the inside or 69.25 – 75.50 on the outside.
We want to wish all of our readers an exciting (or relaxing, your preference) and safe holiday weekend. Ours is truly a global industry, and no other nation in the world has a countenance more reflective of the balance of the world than ours is. In terms of age, the US is still in the sophomore, if not the freshman class. However, its accomplishments over the span of 238 years are unparalleled and a day of celebration and reflection is certainly in order.
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,