The bulls were winners in old crop July this week – and in a large way – while (unfortunately for producers) the bears were winners in the Dec, albeit it modestly. For the week July surged, picking up 441 points. However, old crop futures really put on a show at the end of the week, rallying from 76.17 mid-morning Thursday to finish at the top of a 601 point range, settling at 82.18 on Friday’s close. Dec gave back 41 points on the week, finishing at 73.72. The July – Dec straddle closed out today at an 846 point inversion.
The obvious credit goes to the USDA for this weeks old crop explosion and associated doldrums for the Dec contract.
The USDA estimated 2016/17 ending stocks at 3.2M bales with modest adjustments to production and consumption but a bodacious enhancement of its export estimate to 14.5M bales. Although we (and many others) have said they thought it possible, we did not expect it to occur with nearly a full quarter remaining within the current marketing year. But, the government bean counters were privy to the most recent export figures ahead of signing off on the WASDE release – numbers which the rest of us had to divine.
The export data were strong.
Total net sales and shipments for the week ending May 4 were greater than 160K and 140K running bales for 2016/17, respectively while shipments were nearly 430K running bales. Arithmetic and statistics suggest that 14.5M bales might not have been high enough.
In their initial 2017/18 balance sheet the USDA projected domestic production at 19.2M bales with foreign sales of 14M bales. The net effect was an expected 5M bale carryout on July 31, 2018.
This is not bullish, but it will be sometime before we have a stand of seedlings across the entirety of the Belt, much less harvest the first open boll. This initial projection will most certainly prove dynamic.
For all that, the aggregate world balance sheet was not too depressing. Total world consumption is expected to increase to just below 116M bales while world ending stocks outside of China are expected to contract to 38M bales. If such comes to fruition, the bulls could find support.
The largest word in that last sentence is “if”. For all the perceived bullishness at the hands of demand, polyester and yarn quotes in Asia have moved steadily lower over the last month or so. We read and hear of mill complaints of squeezed margins and swelling yarn inventories. These rumblings are not bullish.
For next week, the standard weekly technical analysis for and money flow into the July contract remain bullish, but the market is now also significantly overbought. Unfixed mill commitments may continue to support this market, but July feels top heavy at its current level. The Dec contract will likely need to depend on weather, over the near-term at least, to mount another challenge of 75.00+. And even so, many in the market suspect that the Mar 31 prospective plantings estimate of 12.23M acres will expand on the upcoming June 30 report.
Producers across the cotton belt made good planting progress this past week. Many growers in West Texas and Oklahoma were blessed with additional moisture and warmer soil temperatures as planters moved into full gear. The Midsouth and Southeast received a nice break in the weather with a 5 to 6 day window of cotton planting and field work before another rain event moved across the region. The rains at this point in time are either blessed or cursed, depending on which grower you are talking with. For the most part, the 2017 US cotton crop is considered to be off to a decent start as we move into mid-May.
Our advice to producers will sound like a broken record, but then again we still enjoy listening to Elvis on the radio, too.
Let’s review: On New Year’s Eve, prices were in the high 60s, and many producers swore they’d sell their eye teeth in a 72 cent market. Sure enough, Dec made it to 72 cents in February, and many producers revised their target price to 75 cents.
Fast forward a few weeks, and Dec broke 75 in early March, sold off, then did it again two weeks later. Many producers revised their target price to 76 or 78.
We spent most of April in a minor selloff to 7219 before returning to the 75 cent level again at the end of the month.
Now, following another dip to the low 72 cent level, we look primed to test the 75 cent level again.
After 3 months in a 3-cent trading range, it is possible we could be primed to break out to the upside. If we do, producers who are standing by their firm offers at 78 cents and above will be the kings of the coffee shop. But we’re inclined to think that with more of a large crop going into the ground each day and a favorable weather forecast for most cotton growing regions, the upside potential is limited. If we see Dec approach 75 cents before the end of the month, it’s time to either fix cotton or buy puts. Talk to your local broker and be sure your orders are up to date.
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