Rose on Cotton: Look for Strong Basis for Higher Quality Recaps

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In a bearish news week, ICE Dec cotton gave up 180 points. The Dec Mar spread weakened slightly, finishing the week at 33 points of carry as the front month continues to consolidate between 66.00 and 69.00.   

The USDA’s latest balance sheets (particularly the domestic one) were bearish with a 130K increase in planted acreage Vs the June 30 annual acreage report driving a 263K bale production increase to 16.14M bales. Further, despite extremely strong export business, the USDA failed to enhance its 11.5M bale export projection and also debited domestic consumption 100K bales at 3.5M. The balance was an increase to projected 2016/17 C/O to 4.9M bales. World numbers were less bearish with projected consumption and C/O near unchanged Vs Aug, although it took an approximate 1M bale decrease in estimated C/I to offset the USDA’s enhanced production estimate at 102.47M.

Perhaps the most bearish element within the report was a 700K bale increase in the production projection for Australia, a major US export competitor, to 3.5M bales.  The Australian Bureau of Agricultural Resource Economics and Sciences has projected new crop production at nearly 4.2M bales.

US export sales and shipments finally cooled, but still remained respectable and net sales remained ahead of the pace required to match the USDA’s export target. Total net sales for the week ending Sept 8 were just above 148K RBs while net sales against 2017/18 were in excess of 26K RBs. Sales cancellations were near non-existent while shipments over the period were nearly 131K RBs. The US is now approximately 47% committed against the USDA’s 11.5M bales export target.

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Significant weather premium should remain within the ICE market over the near-term, at least.  However, stronger prices for some at the expense of fellow industry members is less satisfying in the long run than stronger demand across the entire industry.  Further, despite slowing export sales, prices failed to capitulate.  While strong US export business has done well north of where the market is now trading, large mill fixations remain to be accomplished and certificated stocks continue to hover around 30K – 35K bales.

The downside is that harvest pressure will potentially make itself evident (at least to some extent) by mid-Oct.

Obviously (at least to us), opportunities for forward contracting are all but finished for the 2016 crop. With cotton from the RGV and the southern edges of the belt beginning to enter the pipeline, merchants have little or no incentive to buy cotton sight unseen, and any basis offered will almost certainly include a discount for unknown quality.

Given widespread reports of boll rot in bottom crop, target spot, and other potential yield and quality issues, we believe there will be a strong basis for higher quality recaps during harvest, and potentially afterwards. The past two years have seen historically strong basis offered for quality well into the spring, and there’s no reason we can see for that not to be the case this year.

We believe the best strategy for unsold cotton at harvest is to sell recaps on strong basis and use the option pit to try to capture longer term market moves.

For next week, the standard weekly technical analysis for the Dec contract is somewhat bearish while money flow is supportive. Export sales for the week ending Sept 15 will likely be no weaker than those put forth for the week ending Sept 8.

Have a great weekend!

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; Twitter: @RoseCottonRepor


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