Rose on Cotton: USDA Projections May Have Done Cotton Farmers a Favor
I, like many, really did not believe that cotton would sink to the level at which it is currently trading. Macroeconomic and financial concerns have trumped cotton fundamentals, and to some extent technical factors as well, in driving cotton into the 50s across the board. Amid pressure from index fund rolling, the Mar contract had given up 155 points by the settlement on Thu, the point at which the majority of traders had rolled their positions. Dec cotton collapsed this week, giving up 245 points, settling at 58.93.
Yes, Virginia, there is a USDA and from time to time they produce surprises. Such was the case this week as they made me (among others) a liar by slashing the US export projection for 2015/16 to 9.5M bales, adding the entire debit to projected ending stocks. Further, they ceased the recent trend of world ending stocks reductions, hoisting it to just above 104M bales – all of it outside of China.
The market did not react congenially to the news, but it seems to have collectively said, “prove it” and failed to completely capitulate prior to viewing the latest export data first.
Admittedly, most analysts were a bit puzzled by such a deep cut to the export projection, especially in light of recent strong sales (now 1M running bales over the most recent 5 sales periods) and shipments that began to reach the pace required to ship 10M bales by July 31.
But, just perhaps, the USDA was doing the US producer a solid by helping to drive down prices to a seemingly irresistible level for mills who have long been afforded the luxury of purchasing in a hand-to-mouth manner.
Sales for the week ending Feb 4 were strong – about double the pace requirement to meet the revised export projection. However, shipments were off somewhat, a bit below the pace requirement. The market will likely now pay increasing attention to shipments as the second half of the marketing year unfolds.
Internationally, some merchants and analysts have stated that they expect ICE May futures to either approach, or breach, the 65.00 level, once the release terms of China’s reserve stocks are known. This seems entirely plausible. On something of a dour note, however, Turkey released an official report this week concluding that US cotton imports were a major hindrance to the progress of their domestic cotton production initiatives. It goes without saying that an import duty on US cotton by such a large customer would not be bullish. However, it should be noted that mills in Turkey will likely side with the US on this matter (regardless of the current administration’s attitude toward the US) as they have previously demonstrated.
Last Saturday morning, the National Cotton Council announced that, per its annual survey, US cotton producers intend to commit 9.1M total acres (upland + ELS) in 2016 (or at least they intended to from Dec 15 – Jan 15). We said here last week that a number near to 9M acres should be no surprise. US producers do respond to relative pricing, and it is (and always has been) an integral portion of our analysis. But, at some point (and it seems we have now gone beyond it) the standard relative pricing relationship breaks down. If the survey were taken today we think 8.5M, or less, acres would be a realistic expectation.
Overall, Dec cotton production does not work at current pricing. This is especially true for producers who have no component of revenue from seed.
Our country buyer friends are telling us that despite rumors to the contrary, there is still cotton available in the countryside, and that those producers are beginning to be understandably nervous about the 5 in front of the Mar/May/July contracts.
While the bird in the hand strategy is always the safest course of action, we see much more upside potential for the old crop than we do downside risk. If and when we see the May contract trade to the 65.00 level, however, this relationship will be reversed, and that would be a fine time to let someone else own your cotton.
Last week’s column mentioned the flurry of forward contracting options in the country, and the ways some of these contracts are sometimes “dressed up” by ginners eager to regain lost volume and get a leg up on their competition. The producers we’ve spoken to are having a lukewarm reaction to these offers, and this seems completely understandable.
While it is possible Dec 16 could take a hit and new crop prices could drop another penny or two, it seems far more likely to us that a pre-planting rally or a summer weather market could improve new crop prices by several cents. Obviously, this is a situation that bears monitoring, but be aware that jumping too early could prove more costly than jumping too late (at least for the next few weeks).
For next week the standard weekly technical analysis for the May contract is bearish, but the market is in a technically much oversold condition. Next week’s export sales possess the potential to be monstrous, but, again, shipments need to pick up the pace. Further out, export sales against the 2016/17 marketing year currently stand at nearly 900K running bales, up 43% Vs this time last year, which is encouraging. The old – crop new crop inversion is supportive for the old crop, but not so for new crop Dec futures.
Have a great weekend!
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