May cotton futures on the ICE gapped higher (and never covered) on the opening bell last Sunday evening, ultimately picking up 137 points this week and settling at 65.06. May exploded out of a classic bull pennant chart formation and surged higher for 3 consecutive days despite strengthening US currency and bearish grain sentiment. Dec futures gained 107 points, settling at 65.61. This week’s final results were on par with our discussion here last week. By virtue of having the greatest open interest, July will now become the de facto front month.
I am writing this week’s column from the city which Mac Davis turned to gold by singing about seeing in his rear view mirror and the city where Bobby Knight closed a storied NCAA basketball coaching career – Lubbock, Texas. I have thoroughly enjoyed my visit to the TCGA annual gin show. It has been a productive week.
Folks in Lubbock are hospitable. On Thursday evening we were treated to “A Taste of Lubbock”, which was provided by several local eating establishments of note. I was reminded of the annual “Taste of Chicago” festival, which I attended each of the years that I lived there. Although Chicago will likely top all comers for pizza and “drug through the garden dogs”, Lubbock wins hands down for BBQ and traditional Texas cuisine. I am no food critic, but I gave it “two thumbs up”.
On to matters cotton:
US export demand and shipments continue to far exceed the pace required to meet the USDA’s export projection (although they declined to enhance it on this week’s WASDE report). Shipments were a marketing year high total 452K running bales. On the supply side, the USDA raised its estimate of US ending stocks 200K bales to 4.4M – a figure which the market seemed to discount significantly on Thursday. The USDA barely touched its world aggregate balance sheet, but still failed to break its streak of raising its world ending stocks projection to yet another record high (albeit barely) of 110.09M bales.
Confidence is solidifying in old crop projections – everyone who trades knows that final US production will be reported at 16.35M+ bales, they know that the world balance sheet is cumbersome, and they are numb to it. Further, nearly all expect the US to sell and ship at least 11M bales by July 31.
With respect to the new crop, sentiment seems to be growing that we will see the Dec contract trade at 70.00+, even if for only a short period. The really interesting question is 2015/16 domestic C/O (which we and many others believe could plummet to around 3M bales) and how the US farmer can profit from such a scenario.
Expected production cuts and increases in expected consumption in 2016 by leading US export customers China and Turkey, plus an expectation for increased appetite for cotton imports by Pakistan, seem friendly for 2016 cotton futures. But the full effect of a tight 2015/16 C/O would likely not be most prominent in either the Dec 15 or Dec 16 contracts.
Our preliminary thinking tells us to encourage producers to be vigilant watchers of the market and, perhaps, keep in mind the possibility of purchasing Mar, May or July 16 calls early in order to maximize profit potential on the 2015 crop.
Of course, as we have seen this year, tight domestic stocks can produce a very strong spot basis while world stocks keep ICE in check. This continues to suggest the smartest play may be to price new crop cotton with Dec puts on spring rallies and sell cotton for basis in the fall. Combined with the previously mentioned call strategy, one could realistically expect to earn a significant percentage of sales proceeds from the board while limiting risk to a few cents spent on option premiums.
For next week, the standard weekly technical analysis remains friendly, despite the losses of the last two days. This week’s export report is likely to be weaker than were the last two, but the market seems to have discounted the USDA’s assessment of the US S&D balance sheet. Dec futures will negotiate the weather market and anticipated showers in W TX and with a new crop that is currently expected to be much smaller than 2014’s.
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