May 14 gained 157 points this week when evaluating the data from a rolling front month perspective and 119 points when comparing it to the weekly settlement on Friday, February 7. This week’s gain was on par with our prediction at this time last week.
Monday’s WASDE release did not live up to the expectations of most analysts, including us. The report was expected to be more bullish than bearish, and this is the manner in which the market reacted, even though the numbers did not support it.
The report featured a reduction in excess of 1M bales of ending stocks. However the bulk of the reduction was attributable to a 1M bale reduction in Chinese production, which lessened any bullish effect. After all, how bullish can a world ending stocks projection in excess of 96M bales actually be?
World consumption as well as world ending stocks outside of China were nearly unchanged from the Jan report. The discounting of the report was largely with respect to the US S&D, which was basically a “cut and paste” from Jan, although the market expected a reduction in US ending stocks via an export projection increase.
Much was written about the USDA’s refusal to increase its 10.5M bale export projection (most of it less than flattering). But, perhaps the USDA did not think that the current pace of shipments justified an export increase at this point, or perhaps they see the ginning and classing numbers as we do and opted to allow US ending stocks to eventually be reduced via a likely production reduction in either April or May.
Still, it could have been that nearly half of the current on-call position is sold base July 14 with a 1000 point invert over Dec 14 that could drive large sales cancellations later this MY as mills opt to carry fewer stocks and possibly return to hand-to-mouth buying until supplies loosen a bit. The USDA is aware of how dicey things can get when US ending stocks approach 2.5M bales.
This week’s export report provided the first glimpse of significant sales cancellations in some time, up from nearly nothing on recent reports to approximately 65K bales for the most recent sales period. Still, continued strong shipments and a sales pace exceeding the USDA’s current projection propelled the market 230 points higher, intraday, on Thursday.
Looking ahead to Dec 14, the NCC planting intentions survey was 40K bales shy of our estimate of actual planted acreage for next year, but in excess of that we expected the survey results might actually have been.
NCC’s numbers were not supportive of new crop futures, especially in light of the export estimate of 10.1M bales that was also disseminated which suggests US ending stocks for 2014/15 within a range of 5.0 – 6.0 M bales.
Dec 14 stalled this week, but it has not significantly retraced per the data releases at the NCC conference. Perhaps the market is awaiting confirmation per the USDA Agricultural Outlook Forum on February 20 when USDA will first unveil its 2014/15 US and world S&D. We currently expect that it will closely resemble the S&D put forth last weekend.
Still, we see a number of reasons for Dec to stand pat, if not increase over the near-term, at least. The persistent dryness in west TX and CA cast some doubt on the NCC’s planted acreage, abandonment and yield forecasts.
Also, likely realized production reductions in Australia and Pakistan and possible production reductions in India and Brazil could increase the demand of US cotton over both the 2013/14 and 2014/15 MYs. Further, the number of nations that have taken up the slack of purchases from China this year also suggest that a 10.1M bale export projection for 2014/15 may prove to be light.
Finally, Dec 14 prices will need to maintain their current level without significant delivery month futures price retracement of corn and, particularly, soybean.
For next week, at this time, we expect May 14 to settle lower Friday, Feb 21 on expected decreases in net US export sales due to increases in sales cancellations and a somewhat bearish 2014/15 S&D prognosis from the USDA on Thursday, Feb 20; we expect the front month to trade a range of 86.40 – 90.00 on the inside or 85.50 – 92.75 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.