The ICE July cotton contract picked up 46 points in volatile trading action during a news-laden week, settling at 60.02. The new crop Dec futures contract finished 37 points on last Friday’s settlement at 59.21.
The USDA’s April prognostications were put forth near market expectations, although some market participants were a bit surprised at the 1M+ bale cut to projected 2015/16 ending stocks. Combined with a slight tightening of the US carryout projection to 3.5M bales, this offered support to an already overbought market.
However, the fear/expectation for a bearish export sales report on Thursday allowed our market to collapse overnight on Wednesday. With net old crop sales reported at less than 100K bales and shipments again falling below the pace required to ship 9.5M bales by July 31, the market struggled before posting a respectable close. Friday’s trading action was nearly a mirror image of that seen on Wednesday night and Thursday.
Well, “it” has finally occurred. That is to say, an official announcement from China’s NDRC regarding the release of CNCRC reserve stocks (someone should mention to the Central Government that acronyms are much easier to pronounce if they contain a vowel(s)).
China has now announced its intentions to offer around 9M bales of its reserve surplus at a price incorporating its domestic cash price index, world market value and value-added tax (VAT). China will give preference to the release of higher quality stocks this year, including import stocks from its reserve. Auctions are scheduled from May 3 – Aug 31.
However, China also stated that it plans to purchase additional high quality cotton going forward in an effort to improve the overall quality of its strategic reserve. This point, in our opinion, transformed a potentially bearish piece of news into something less so. While much of the news out of China was expected or leaked previously, the intention to purchase stocks is, we think, supportive.
It is true that the market is not likely to commit in any large way to a prevailing direction until it sees how the planned reserve auctions fare and/or until new crop acreage and production becomes significantly threatened. But, the intention to improve quality of reserve stocks, coupled with a commitment to move higher quality stocks early during reserve auctions suggests that the overall quality of the CNCRC reserves is, in fact, questionable. This could provide support to ICE futures over the near- to medium-term.
The following excerpt and insight is courtesy of Barry Bean, Bean & Bean Cotton, Company, Gideon, MO.
In very significant domestic cotton news, the cotton industry got an unwelcome surprise from Secretary of Agriculture Tom Vilsack on Thursday afternoon when the USDA announced a 2 cent change in the transportation adjustment to the AWP, immediately increasing the cost of redeeming loan cotton by 2 cents/lb and similarly reducing the LDP on unsold cotton by 2 cents.
Effectively, this works out to be a $10/bale penalty for every US grower holding cotton and every merchant owning loan equities. While transportation adjustments have been made in the past, they are historically small annual adjustments made in August, not “gotchas” sprung on an unsuspecting industry during a critical period of the marketing year.
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The impact of this change was reverberating through the industry on Friday. Phone calls to major merchants, commodity organizations, and ag lobbyists indicated that the move came as a complete surprise to the industry. We contacted several congressional staffers and lobbyists who similarly had no indication the change was coming.
The $10/bale penalty does damage. By some estimates, the US cotton industry took a $35 million hit over and above ordinary market fluctuations. But more concerning is the unpredictable nature of the adjustment. The USDA’s role is to help stabilize and support agriculture, and Thursday’s adjustment makes it less effective at that job.
We haven’t yet crafted a strategy to deal with an unstable AWP, and we’re hopeful that next week will bring more insight to the decision and its ramifications. With any luck at all, we’ll have more to add on this next week.
For next week, the standard weekly technical analysis for and money flow into the Mar contract have turned bullish. The index fund rolls period has culminated and the market can now attune itself to any tightening of old crop supply while the weather will become a major factor for the Dec contract. The old crop – new crop spread remains heavily inverted, which would suggests that obtaining some protection on any significant Dec rallies is likely prudent.
Have a great weekend!
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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