The ICE Mar contract gave up 117 points on the week before Christmas, with fresh mill buying and mill on-call fixations apparently muting the effects of speculative liquidation. The Mar contract finished the week at 69.87 with the nearby spread weakening a bit to (0.40), still far below full carry.
The ICE cotton market performed nearly as one would expect as Christmas and New Years approach. That is, trade volume slowed noticeably, specs liquidated long positions ahead of the quarter and year’s end and physical business seemed to down-shift a couple of gears.
Still, there was positive news on the week.
US export sales for the week ending Dec 15 were healthy at just above 280K net running bales and shipments, while still not at the level needed to meet the USDA’s export expectation, continued to hold well above 200K running bales.
Analyst’s opinions regarding our market appear as becoming clearly bifurcated into bear and bull camps as the market continues its consolidation phase. After all, a notable break or rally is how most market consolidations meet their end.
BULLS: The bull camp maintains that there are simply too many mill on-call commitments under our market and too little natural selling pressure to spur strong liquidation by the spec community.
BEARS: The bears argue that, without (and maybe even with) the USDA’s 12.2M bale export projection being realized, 2016/17 US ending stocks could reach as high as 5M bales. They also argue that, without price dips the USDA target will likely not be met. They further cite the expected uptick in export business competition from the southern hemisphere during the latter months of the marketing year.
While we would like to be counted among those in the former camp, we (for now, at least) realistically find ourselves in the latter.
Strong US currency and the very real threat to the NAFTA deal place US export business into Latin America and the US domestic industry in serious peril. Too, China will soon commence another round of reserve auctions, with extra mill export quotas likely not forthcoming.
But, perhaps the current old crop/new crop market inversion ahead of plentiful US supplies is the most telling bearish factor. If the inversion persists, US merchants will not be able to afford to carry inventory from 2016/17 into 2017/18. Merchants have already weakened basis quotes to mills and this will continue up to the point at which it is more profitable to certificate cotton and sell it to the board. What seems to be an almost inevitable strong increase in ICE certificated stocks over the coming months should provide strong discouragement for specs to steadfastly hold onto their long position in the market.
Shortened holiday weeks are always a bit of a spooky time for the spot market.
On the one hand, cotton offices are running skeleton crews, traders are distracted by family obligations, and producers may be facing end of the year payment deadlines. In nine years out of ten, this makes the last week of the year a terrible time to sell cotton. On the other hand, in that one year out of ten, this is the perfect time for a short merchant to quietly fill his inventory at a favorable price and basis.
So where does that leave a producer, particularly one with family or banking obligations keeping him away from the market screens for the next week? We’d advise leaving recaps with the local broker sporting a firm price tag two to three cents above Friday’s close to take advantage of any surprise rallies.
More Cotton Commentary on AgFax
For next week, the standard weekly technical analysis for and money flow into the Mar contract are neutral to supportive. US net export sales for the week ending Dec 22 will likely again eclipse the weekly pace required to realize the USDA’s export target, but shipments still need to quicken. And, although prices have been favorable for strong sales figures to be put forth next Friday, the holiday season has more than once taken a toll on physical business.
We want to wish all of our readers a very happy, safe and enjoyable holiday season. Merry Christmas and best wishes for a prosperous New Year!
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