Rose on Cotton: Stocks are Tight; Think About Forward Contracting

©Debra L Ferguson Stock Photography

ICE cotton continued higher this week on tightening old crop stocks with the Dec and Mar contracts each gaining 182 points with the Dec Mar spread, of course, remaining unchanged at an inversion of 57 points. 

The verdict is in – partially, at least: That is, 2016/17 domestic ending stocks (2017/18 beginning stocks) are tighter than the USDA- projected 3.2M bales by virtue of higher than projected exports, and will most likely be estimated near 2.8M – 2.9M bales on next week’s Aug WASDE report release. Historically, ending stocks at levels below 3M bales have spurred positive market action. This time is no exception, although the market seems to have anticipated such this week, with ICE cotton showing little reaction to the USDA’s latest supportive data.

Total sales against 2017/18 were lower Vs the week ending Jul 20 at approximately 138K running bales (total of ~5.4M 480lb bales, to date). Old crop sales cancellations were seemingly mostly ignored by market participants.

Further, sales may continue to be strong over the coming weeks. With plentiful rains across the cotton belt and harvest season approaching, merchants may become more willing to commit to forward sales.

Weather news this past week was of beneficial rainfall across West Texas, New Mexico and Oklahoma. Much needed moisture in this region has greatly improved yield potential on both irrigated and dryland acreage. Most, by far, of the US cotton crop has progressed nicely over the past two weeks, and to our eyes crop conditions have continued to improve.

It certainly seems as though any further yield limiting threats lie within the prospects for harvest weather rather than drought during the peak fruiting period. Recent USDA crop ratings consider the crop 56% good to excellent and 30% fair and we would expect further improvement to these figures in light of the recent favorable growing conditions across the vast majority of the Cotton Belt. The USDA classing office in Corpus Christi has now classed 118K bales of new crop South Texas cotton, with 19 gins reportedly in operation.

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The Aug WASDE report is scheduled for release next Thu at 12 p.m., ET, 3½ hours after the release of the weekly export report. Hence, 2016/17 ending stocks may be traded much more heavily on the export report release than on the release of the updated domestic WASDE balance sheet. We have not yet firmed up our supply and demand expectations for the WASDE report, but at this time we think that the report is not likely to be bearish. The International Cotton Advisory Committee, which has maintained for quite some time a much more bullish supply and demand balance sheet than the USDA (and most other reporting agencies) has moved its 201/17 projections to much more closely resemble those put forth by the USDA in early July.

Our friends in the country tell us they are getting an increased number of inquiries about forward contracting, and that the basis has tightened slightly. There seems to be a consensus that Dec has the potential to move to the 7200-7400 level this next week, and we think this is a reasonable expectation. If experience proves predictive, we would expect Tuesday, Wednesday and Friday to hold the best potential for a modest move towards that level.

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That analysis, however, assumes that the situation outside cotton remains stable. Given Russia’s de facto declaration of trade war, North Korea’s sabre rattling, and the continuing game of musical chairs among White House staff and advisors, there is enormous potential for political and macroeconomic events to shove cotton fundamentals aside for days or weeks.

Given the potential for a large US crop and simultaneous trade depressing events, we think it would be prudent to price cotton through forward contracting or put options this next week on any move over 7100. Rolls to forward months are also well worth consideration. It may also be worth considering contracting options that leave open the possibility of collecting an LDP this fall if the market should collapse based on either fundamental or macro concerns.

For next week, the standard weekly technical analysis for and money flow into the Dec contract remain bearish, with the market’s longer-term oversold condition having mostly evaporated. Still, next week is mostly about the WASDE report, and this one will give US the first look at the USDA’s field data (in some states). The data will get better over the next couple of months.

Have a great weekend!


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