The July contract began the week with a rash of short-covering, no doubt spurred by ICE’s weekend decision to significantly increase margin requirements. July gapped well over 100 points higher on the opening bell last Sunday evening and touched 87.18 (twice) early in the week.
But it was downhill from there, with July posting a 273 point loss versus May 12, settling at 79.45. Dec gave back 27 points on the week, finishing at 73.45. The July – Dec straddle remains strongly inverted at 600 points, although it widened to well above 1000 at times.
Everyone has either written, talked or preached about the burdensome mill commitments that have been continuously rolled forward over recent months and what the likely result would be – a sharp and rather nasty short-covering rally, depending on which side of the market one is standing.
As stated above, ICE helped by increasing margin requirements for trading on Monday and then upped the ante again for Tuesday in an effort to quell volatility. However, it just pushed too many shorts to the point of capitulation, and the rest is now in the record books – including daily record volume of nearly 110K lots on May 15.
What We Got Wrong And Right
I will have to eat at least an appetizer portion of crow, for I have said that I never really thought July would seriously challenge the 85.00 mark. But once the old contract high just above 80.25 was taken out, those old crop futures were off to the races.
Still, I have told everyone who cared to ask my opinion that if one was holding out for the sharp rally, it would be wise to pick an exit spot ahead of any potential move into the stratosphere. It never seemed, at least to me – even if July did ascend to the levels which it recently has – that it would be able to navigate the thin air for too long. Such is the stuff of short-covering rallies.
We took some ribbing about our prediction, at this time last week, for a significantly lower close on May 19 versus May 12, but sometimes we get it right.
For all that, we sincerely hope that any producers with old crop on-call commitments remaining to be fixed last week were able to tidy up such matters earlier this week.
Export sales and shipment data for the week ending May 11 were once again very strong. However, the market seemed to have anticipated such and, even with July’s rapid retracement from its new contract highs, cotton was trading at a significant premium to the average price where sales for the previous assay period had been accomplished. That’s to say nothing of the premium versus the intraweek lows of the period ending May 4.
And, cancelations were a marketing year high of nearly 61K running bales. They will likely be reported higher still on next week’s report.
ICE certificated stocks have moved above 400K bales and this should serve as a passive warning to specs with newly lined pockets that getting significantly long with scheduled index fund rolling maneuvers imminent might not be the wisest thing to do. And yet the July roll could be orderly, with significant on-call mill commitments likely remaining against the July contract.
Switching gears, political events have very significantly affected markets this week. Recent network and cable news broadcasts have featured more cliffhangers and red herrings than the run of the mill episode of “House of Cards”.
And it isn’t all about Mr. Comey receiving his walking papers, the hiring of special prosecutors, the Russians or Syrians or even Kin Jong-il. (For what it’s worth, I still prefer President Trumps coiffure to that sported by Kim.)
No, allegations of high-level bribery involving Brazil’s president caused marked deflation in the nation’s currency, which most definitely pressured CME soybean futures while not doing any favors for either the CME corn or ICE cotton markets.
Ag Secretary Issues A Vague Maybe
On a more cotton-specific note out of D.C., Secretary Perdue listened to concerns regarding and commented on revenue challenges facing US cotton producers. But in the end, his final stance sounded far too familiar to that of his predecessor. That is, any financial relief via an enhanced safety net involving the designation of cotton as an oilseed crop will likely have to wait until the negotiation and passage a new farm bill.
That sounds like a definite “maybe”, at best.
On the production side, planters have been rolling across West Texas this week under a medley of weather conditions – gusty winds, sands storms and sporadic bouts of severe weather. Still, the majority of the state’s crop is reportedly off to a good start and, as usual at this point of the season, any additional moisture from the skies would be welcomed.
Excellent planting progress under ideal conditions has reportedly been made across the majority of the Midsouth and Southeast over the past 10 days. Additional rain is expected across both regions this weekend and into early next week, which will likely slow, at least, remaining planting operations.
Producers need to put this week’s whiplash-inducing trading range in context. After months of trading in a range between 72 and 75 cents, we saw the Dec contract traverse the 3-cent trading range in a few days and then return to center of that range. While the trading seemed extreme in the moment, it is hard to make the argument that the new crop contract is doing anything out of the ordinary.
Indeed, the new crop basis seems to support the argument that forward contracting is business as usual. The contracts that were available last week are available this week at the same basis, and our advice to growers remains essentially the same – price cotton with either a forward contract or puts on rallies approaching 75.
For next week, the standard weekly technical analysis for and money flow into the July contract remain bullish, but the current daily technical picture is neutral to somewhat bearish. Unfixed mill commitments may continue to support this market, but July feels top heavy at its current level.
Outside of weather watching, traders will begin to prognosticate figures to be put forth in the June WASDE report and the June 30 acreage report. The upcoming long holiday weekend could serve as a catalyst for further spec liquidation.
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.