Mar picked up 56 points W/W to finish at 60.08. The trading range expanded from previous weeks, but was still very tight at just over 200 points. A new contract low was made this week at 58.53, but it failed to generate significant fresh selling. Dec 15 picked up 53 points, settling at 64.36.
Last week we were looking for positive notes for this holiday-shortened trading week. And, we think that support is still being built for this market.
Demand for US stocks for export has increased significantly over the past 3 weeks within the ICE futures price range of 58.74 – 62.00, basis Mar. Net sales over the past 3 weeks have totaled in excess of 660K RBs, well above the pace requirement to meet the USDA’s export target. Nearly 50% of this total was tallied over the most recent sales period. World cash prices have generally moved higher W/W with cash prices in India rising steadily while the state steps up purchases for its reserves.
All of this information is supportive, yet the pace of export shipments, although significantly higher W/W, continues to concern traders. Mar could only manage a 68 point intraday rally on the previous settlement of 60.03.
On the supply side, available data continue to suggest – to us, at least – that this season’s US production may fall well short of the USDA’s latest projection of 16.4M bales. Production in the southern hemisphere may also take a hit with Brazil estimating less planted area and production and with droughty conditions developing over Australia.
The weekly technical analysis (both standard and our proprietary models) continues to suggest either consolidation or lower price movement. The fundamental analysis is a bit more supportive, at least from the demand side. However, significant producer selling likely awaits not too far overhead.
We do not believe that it is time to grow horns just yet. Our overall market bias for Mar continues to be for either consolidation or lower price movement over the near- to medium-term.
Given that the spot basis still remains historically strong, we’ll run the risk of sounding like a broken record and encourage producers to sell cotton against a Mar of 6100 or better and pick up Dec 15 calls to participate in spring rallies. Some of our esteemed colleagues are recommending a similar strategy with July calls, but the message remains consistent: Unless you have a brother-in-law in the warehouse business, you should let someone else pay storage and own calls or futures if you’re bullish into the spring.
Looking a bit further out, Dec 15 futures remain below the cost of production while corn and soybean futures remain above the break-even line. Our overall analysis encourages us to seriously consider Dec 15 posting a pre-planting rally above the 70.00 level – perhaps into the mid- to upper 70s.