The bears were winners this week on the ICE cotton contracts, with May posting a 157 point setback, settling at 75.52. The nearby spread continued to weaken, finishing Fri at 204 points of carry amid what has thus far been a mostly orderly switching between the two contracts.
Since we last wrote this column the National Cotton Council (NCC) released the results of its annual acreage survey of cotton producers. US producers indicated that they intend to plant just a shade above 11M acres in 2017 – as of Jan 15. If the survey had been through Feb 15 we think acreage would have been projected at 11.5M – 12M acres, and we expect the USDA to project US planted area higher than the NCC at next week’s annual Ag Outlook forum.
NCC estimated 2017 total US production at 16.8M bales with 2017/18 domestic ending stocks projected at a historically bearish 5.65M bales. We expect the USDA to top this figure in its preliminary 2017/18 domestic balance sheet.
It is perhaps a bit premature to either kill or place the 2017 crop in a Guinness publication, but there is nothing bullish to be found in the two previous paragraphs.
However, on the other side of the S&D equation, demand for US cotton continues to be impressive. Total net sales and shipments against the current marketing year for the week ending Feb 9 were significantly greater Vs the previous sales period at nearly 235K RBs; 123K RBs of new sales were logged against 2017/18. Shipments were off Vs last week, but were still very strong at approximately 365K RBs. These figures indicate to us that US exports very well could reach as high as 13M bales Vs the USDA’s updated projection of 12.7M bales.
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Still, we think that there are some issues for bulls (both old and new crop) to contend with over the near-term.
The foremost factor may be the continued daily increase in ICE certificated stocks, which were reported at nearly 307K bales as of yesterday. This should serve as a reminder to the specs that quality US cotton is plentiful and further that the trade is willing to sell bales against long specs, especially if the July – Dec inversion persists. It further seems that much of the huge mill on-call commitments against the Mar contract were rolled forward against the May contract. It is unlikely that mills will be overzealous in fixing prices on the basis that they have purchased and rolled, especially given that China is slated to commence offering stocks from its reserve stockpile on Mar 6 at a rate of nearly 140K bales per day through the end of August.
Additionally, as we move toward spring, the natural selling pressure associated with US bales against old crop contracts will continue to wane, at least until the southern hemisphere’s crop begins to find its way into pickers, gins and warehouses.
Producers reading this might understandably be nervous about unfixed and/or unhedged cotton. There are few fundamental reasons to be bullish going forward into 2017. On the other hand, experience has shown us that a lot can happen between February and November, and it pays to be able to take advantage of that.
In the past week, the major merchants have all moved into the countryside with similar offers. Producers can find a half dozen forward contracts from reputable buyers within 25 points of each other, differing only in premiums, discounts, or other terms.
This presents two challenges to producers:
First and foremost, they need to understand the differences between these offers. Contract details that seem like so much boilerplate in February can be the difference between profit and loss come November.
Secondarily, one should weigh whether merchants will continue to offer comparable contracts in the coming weeks, or whether competition will force some merchants to get more aggressive with their basis or terms to lock up the cotton they need on the books prior to harvest.
If one suspects a better basis may be offered in the coming weeks, the smart play would be to buy price insurance in the form of put options (we like the Z7200P@3.13) and stay close to your gin office or local buyer between now and planting time.
Whether you decide to forward contract or use the option pit, though, we think it is advisable to have 30-50% of your crop priced at current levels, perhaps more if you opt for puts.
For next week, the standard weekly technical analysis for and money flow into the May contract remain bullish, with the market having worked away much of its recent overbought condition. US export sales will likely be off Vs figures put forth this week, but shipment data should continue to be robust. A projection of 11.5M+ projected domestic planted acres within preliminary USDA balance sheets to be released on Thu, Feb 23 will likely be taken as bearish; it seems unlikely that aggregate world projections within those balance sheets will incite a thundering charge from the bulls
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