The ICE cotton market was friendly to producers this week, with both the Dec and deferred contracts reacting to a myriad of factors that were interpreted as bullish. The Mar contract surged, gaining 330 points on the week while the Dec – Mar inversion moved from a level of small carry to, at times, well over 100 points inverted.
It was a painful and bloody week for the bears. Although the election of Donald Trump as the President-elect was expected to be unfriendly for US currency value, the opposite has been proven to be overwhelmingly true. The greenback index picked up around 2.5% on the week with the index now trading at near decade and a half highs.
While a strong US dollar is normally a form of wolf’s bane for US commodity markets, inflation fears seemed to propel our markets higher.
US export sales for the week ending Nov 17 were nothing special, given that the biennial Sourcing Summit in CA was held during the sales period. Net sales against 2016/17 in excess of 200K running bales again eclipsed the weekly pace required to match the USDA’s export projection, but the shipment pace continues to be very disappointing. Although the US is around 58% committed against the USDA’s 12M bale export target, only 21% of the target has thus far been shipped.
Internationally, tight physical supplies in India as a result of the process of renewing the nation’s most used bank notes (largely in an effort to reduce the prevalence of “black money” in the economy) has constrained cash liquidity and thus ginner and broker ability to purchase new crop cotton.
In China, logistical constraints between Xinjiang and the eastern provinces have also caused some tightness in nearby supply.
Perhaps the most bullish factors this week were the continued failure of ICE certificated stocks to significantly accrue ahead of the Dec first notice day and the large mill on-call position against the spot month.
The bottom line is, we think, that US producers are currently the recipients of a windfall, of sorts. But current opportunities for US producers may not endure long.
The monetary situation in India (the largest export competitor with the US) is temporary, and logistical constraints in China will also likely be resolved. Too, US export sales are likely to move lower over the near-term, at least, with new sales into Latin America likely to be few and far between until more is revealed about the effect of the incoming US political administration on established trade agreements. Physically, there is no shortage of cotton in the world, despite artificial tightness in both India and China.
Nations within the African Franc Zone reportedly have significant stocks to market, and both Australia and Brazil are expected to have significantly higher production in 2017 Vs this year. This should be especially true for Brazil if the current ratios of US to Latin American currency values persist.
US producers are seeing a very slightly widening basis, in line with the past two seasons, but still well ahead of a historical average. US crop quality continues to remain high, so while there is still a substantial demand for higher quality cotton, merchants are able to source that from several different US regions.
Historically, Thanksgiving week is a challenging week to move spot cotton. Many cotton offices are working holiday hours, and producers and traders alike will be distracted by the holiday and their in-laws. This distraction has occasionally offered an opportunity for exporters to spring a surprise on their competitors. Throw first notice day into the mix and you have the potential for fireworks. Smart producers will have their recaps on their broker’s desk with offering prices, just in case such an opportunity presents itself.
For next week, the standard weekly technical analysis for and money flow into the Mar contract are bullish, but the market is also now considerably overbought. US net export sales for the week ending Nov 17 hold potential to be disappointing. First notice day arrived for the Dec contract on Wednesday, at which time (theoretically) the Dec contract should reconcile with the cash market.