Rose on Cotton: Unusually Strong Holiday Volume Offers a Boon

Following a difficult planting and growing season and amid horrid late harvest conditions, US producers have struggled to be thankful as the holiday season commences. That said, ICE Mar cotton futures gained 110 points this week, settling at 63.93 on unusually strong holiday volume. The Dec 16 contract picked up 49 points this week, finishing at 64.78.

Evidence that demand for US cotton for export exists near and above the 62.00 level continues to mount. The rumor mill continues to churn out reports of tepid demand and slow US off-take. But those rumors simply are not true. The US sold in excess of 270K running bales for export for the week ending Nov 19, with total cumulative net sales over the last four sales periods in excess of 750K running bales.

On the supply side, the two largest cotton producing states (TX and GA) have around 35% of their combined acreage remaining in the field. As of today, open cotton in parts of TX was being draped with a sheet of ice. We now think that the US crop will likely fall to below 13M total bales on the final tally in May, 2016 – if not sooner. Quality is also unlikely to markedly improve from its current 57% tenderable level.

For next week the standard weekly technical analysis for the Mar contract is neutral but improved from last week’s bearish bias, while weekly money flow into the Mar contract is bullish. Next week’s export sales are again likely to be supportive, while the market will begin to prepare for smaller US and world production estimates on the USDA’s Dec WASDE report.

On the spot side, the basis remains strong for higher quality cotton, but this late in the season it’s more difficult to find producers with large lots of high quality cotton that don’t also include some percentage of discounted qualities. Fortunately, discounts for lower quality bales are being figured relative to the basis for middling bales, which means even light spot recaps are bringing a basis 200-400 points higher than they would in a typical year. We continue to encourage producers to sell before the end of the year.

Our broker and ginner friends tell us the coffee shop conversations are beginning to turn to 2016 planting intentions. While a lot can happen between November and May, the consensus in many quarters is that producers with good ground can make better money with sixty five cent cotton than they can with nine dollar beans or four dollar corn. If prices continue to trade sideways, we wouldn’t be surprised to see a 10-15% increase in cotton acres for 2016, but it would take Dec 16 in the high 70s or 80s to inspire a bigger shift in acres.

Have a great weekend!

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