The bulls ran out of steam this week, allowing the bears to maul them with the lead May contract losing 387 points; the July contract gave up 312 points and the Dec 180. The nearby May – July spread weakened to finish the week at full carry of (201) points while the July – Dec straddle inversion weakened to 264.
This last two week’s trading action give us increased confidence in never being long cotton during the index roll period – especially when a significant number of certificated stocks are showing – and instead opting to either be short or to sell short-term rallies over the period. Still, rallies to sell were near non-existent this week.
The USDA’s latest export sales figures remained strong, although off their recent pace. Total net sales for the period were approximately 270K RBs, with shipments at nearly 465K RBs. Sales cancellations were significant at nearly 54K RBs. An additional 121K RBs were sold against 2017/18. The US is now 102% committed against the USDA’s current export target of 13.2M bales (480s) while shipments are 68% of the USDA target.
It certainly seems possible that US exports for the current marketing year could ultimately be realized at 14M+ bales. Still, we hear that large export sales cancellations could be on the horizon if ICE July contract futures breach the 80.00 level, and, per our analyses, we concur.
The current level of mill on-call commitments against the May and July contracts remains a supportive factor. However, index fund and spec liquidation have allowed the market to retrace to a level where mills can fix price on their commitments. Hence, mill on-call sales commitments could be reported at significantly lower levels over the near- to medium-term.
The USDA will release its April WASDE report on Tue, April 11 at 12:00 PM, ET. Although this report will not feature an updated balance sheet for the 2017/18 marketing year, all current reports indicate an expectation for marginally higher consumption and significantly higher production Vs 2016/17.
With respect to the current marketing year, The USDA went out on a limb last month by projecting US production at 17.23M bales, which currently available data indicate is not going to occur. Production will most likely be realized at just above 17M bales. Still, it seems unlikely that the USDA will amend last month’s prognostication ahead of official numbers being made available next month by the USDA’s statistical arm, but smart traders will have accounted for this expected reduction in their marketing and/or trading plans.
More Cotton Commentary
Of course, the most plausible explanation for the USDA’s stumble is Russian hacking into the Department of Agriculture’s computer system. We may even have a spy/mole in some of the USDA’s field offices. I think by now we all realize that one of Putin’s primary aims in wanting to re-establish the Soviet Union is to absorb cotton producing regions within the FSU.
I say this in jest only to make myself feel better from falling asleep last evening to news reports of US missiles pelting Syria in retaliation for a barbaric domestic chemical weapons attack and awaking this morning to reports of a lethal low-tech terrorist attack in Sweden.
It is worth noting that commodity investors generally do not react in a bull-friendly manner with respect to political, geographic and social conflict and unrest.
On the demand side, we can easily make a case for US exports to ultimately be 14M+ bales by July 31; however, it seems unlikely that the USDA will bump their projection 800K bales in their April balance sheet. Around 13.7M (500K bale enhancement) seems more probable. On the downside, it also seems to us that domestic use will likely be lowered to 3.2M from 3.3M bales at some point before July.
The bottom line is that US ending stocks will likely be projected 500K bales lower, at least, on the upcoming WASDE Vs Mar at near 4M bales. Expected adjustments to US production and consumption could trim 100K – 250K bales off this figure, if not this month, then in the near future.
Internationally, we expect the USDA’s 2016/17 updated balance sheet to evince modestly higher projection of aggregate world production and a slightly lower estimate of world consumption. It seems likely that US supply and demand figures are likely to be the market-movers on Tue, if any are in fact revealed.
Producers watching the Dec contract’s slow decline may be tempted to take advantage of current prices, protecting themselves against a further decline and a bigger crop. We can’t say that that would be a bad move, and we’d never want to argue against selling at a profit.
That said, the continued strong demand for US cotton suggests that the market should be capable of handling a larger domestic crop in 2017, particularly if the US produces its typical abundance of long staple middlings. Additionally, we’ve seen no slippage in the basis, and the current level of aggressiveness by merchants doesn’t suggest a wider basis any time in the near future.
So, while the most conservative strategy would be to sell additional bales at current levels, we believe waiting for a rally back to the mid 70s is a reasonable risk, at least for the next few weeks. As always, we’ll know more this time next week.
For next week, the standard weekly technical analysis for and money flow into the May contract remain bullish. On a daily basis the technical analysis is bearish, although the market is considerably oversold. Index funds will continue to roll long positions out of May next week and open interest in the contract should continue to recede at a steady pace. There seems little doubt that we will be analyzing July as the de facto front month before next Fri arrives.
At this time, rallies on old crop futures (July) look to be selling opportunities.
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