The bears were solid winners on the week with the Dec and Mar contracts giving up 201 and 227 points, respectively. The net effect of this week’s trading action was a strengthening of the Dec – Mar spread to an inversion of 47 points.
Concerning the matter of projecting 2017 US production, The USDA punted (or at least laterally passed) to the National Agricultural Statistics Division in the July WASDE report. We did not expect that they would drop their expectation to meet ours (and those of other analysts) at around 18.3M bales, but we thought that they might meet us half way.
Overall the report leaned bearish with nearly 1M bales added to 2017/18 beginning stocks, and the USDA still remains nearly 500K bales behind the official government estimate of production in Brazil for 2016/17. This adjustment was nearly entirely responsible for the approximate 1M bale increase in ending stocks for the upcoming marketing year.
Still, the increase in projected world aggregate production mostly offset the USDA’s new optimism for world consumption.
Demand, demand, demand….
From this month forward through Nov, the USDA will send its personnel into cotton fields within the states of AR, GA, LA, NC, MS and TX during the final 10 days of each month to count squares and bolls and also to assay a number of other plant and field parameters. Production in the balance of the cotton producing states will be projected via surveys, industry interviews and statistical modeling.
The USDA supplants (largely) boll counts regarding data collected for model input in July (Aug WASDE report), with average values from recent seasons as predictors in their statistical models. Hence, when a crop is later than average (as much of this year’s crop is) the Aug production estimate is often upwardly biased. The Sept WASDE report normally provides a much clearer picture of what to ultimately expect; this is due to both data enrichment and planted acreage and abandonment updates.
Demand for US cotton for export weakened over the week ending July 6, but remained quite strong, seasonally. Total net sales against 2016/17 were a MY low of approximately 15K running bales with shipments of 203K. Total sales against 2017/18 were almost 155K running bales. Cumulative new crop sales are now approaching the 5M bale mark.
Regarding the low net sales figure for the current marketing year, it simply seems that there are very, very few old crop bales sans sales commitments against them.
New crop sales are slowing at this point of the season, due to the large volume of new crop already committed. Merchants and marketing organizations may simply be growing wary of continuing to offer large volumes for sale.
It is also worth noting that the sales reporting period included Independence Day festivities.
Domestic weather conditions are returning to normalcy in July. Texas has once again turned hot and dry with crop watchers keeping an eye on weather radars and praying for rain while the Midsouth and Southeast are sweating in the summer heat and high humidity occasionally interrupted by customary isolated pop-up afternoon showers.
Business should be good for local input suppliers as the recent moisture across the cotton belt has also brought an increase in mid-season insect pressure and the need for PGR applications in order to keep plant growth under control. Field reports from east to west are beginning to note more and more cotton blooms daily with timely moisture needed in the ever-important blooming into boll setting stage over the next several weeks in order to maximize yield potential.
Producers with unpriced cotton should likely settle in for a Dec contract in the summer doldrums. To our eyes, it looks as if we have replaced the 72-75 cent range with a 66-69 cent range, and without a significant weather or economic surprise, it’s hard to imagine breaking far out of that range before the August 10 WASDE.
With that said, keep an ear tuned to the Lubbock forecast and listen for reports of abandoned or damaged Texas acres. It’s going to be a tough month for bulls.
For next week, the standard weekly technical analysis for and money flow into the Dec contract remain bearish, but the market is again somewhat oversold, on a weekly basis. Ahead of the Aug WASDE report, it looks like the market will trade on weather events (or lack thereof) and weekly assessments of export demand.
Have a great weekend!
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