The ICE May contract picked up 107 points this week, settling at 78.36. Dec futures picked up 34 points on the week at 75.63 with the July – Dec spread (straddle) finishing the week at a 273 point inversion. The nearby May – July spread continues to trade a narrow range on either side of 100 points of carry.
The only major government report released this week was the USDA’s weekly export report, and it was more of the same, with respect to what we have witnessed recently. Total net sales against the current marketing year for the week ending Mar 9 were reported in excess of 350K running bales; shipments were at a similar level. New sales against 2017/18 were nearly 148K running bales!
With respect to on-call mill commitments, mills apparently fixed significant contracts against May, but added commitments against July, the net effect being an increase in commitments against 2016/17 of approximately 100K bales to approximately 8M. And this keeps things interesting for the old crop contracts, especially for July.
Both export and on-call data are definitely supportive for old crop futures prices.
With respect to domestic production, a well know research firm has projected 2017 planted acreage at 11.1M acres Vs the USDA’s initial projection from late Feb of 11.5M and the National Cotton Council’s earlier 11M acre prognostication. At this time, all pertinent data leads us to believe that 2017 planted area within the US will be closer to 12M acres than to 11.5M. Recent weakness CME soybean futures and RMA insurance base prices of 7.00 – 74.00 support, we think, cotton acreage moving northward as planting time approaches across the bulk of The Belt.
Regarding the old crop, the USDA’s uncharacteristic adjustment to the US production estimate (from 16.96M to 17.23M bales) in its Mar WASDE report certainly looks as if it will overshoot the mark just a bit. The USDA’s latest classing data suggests that final production will be logged at around 17.1M bales.
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In international news, China has completed week number two of its annual auction of reserve stocks. While off-take is neither slow nor bad, it has decreased since the auction commenced even as prices have moved southward in a steady manner. Such suggests that quality issues with China’s reserve may once again prove bullish for US cotton prices.
We are beginning to see some basis competition for new crop forward contracting. After a couple of months with every major merchant offering the same basis and contracts differing only in premiums, discounts, and terms, it is encouraging to see a few firms starting to get more aggressive in an effort to put cotton on the books.
Our basic advice remains the same as last week – price 25% to 30% of your estimated production at current levels, with an eye toward bumping that percentage up to 50% if Dec should move to or above 78 cents. Once this crop is planted, it’s hard to argue against either booking 50% or laying in puts in hopes of a better basis in the fall.
For next week, the standard weekly technical analysis for and money flow into the May contract remain bullish. The next major report release will be the USDA’s annual Planting Intentions Report, scheduled for release on Mar 31, which will also be the second day of the index fund roll period for the May contract.
This combination could spur some weakness in our market.
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 the Rose Commodity Group. For more info on Rose Commodity Group or services offered, please visit: www.rosecommoditygroup.com