Rose on Cotton: Forward Contracting Basis Feels Lukewarm; WASDE Acres Report Anticipated

Young cotton field. ©Debra L Ferguson Stock Photography

The weekly winning streak for the bulls ended at 10, with the Mar contract giving up 62 points on the week to settle at 78.00 – but not before the front month managed to breach and trade (ever so briefly) above the 80.00 level. The Mar – May spread again inverted briefly over the course of the week’s trading action, but finished modestly tighter Vs last week at (24); the inversion along the forward curve remains steep.  

Demand for US bales for export remained formidable as ICE futures traded near 77.00 – 78.50. Total net export sales for the week ending Dec 28 were modestly higher Vs the previous sales period at nearly 200K running bales. Shipments were significantly lower at around 219K running bales and have yet to exceed the weekly pace required to meet any of the USDA’s export projections for the current marketing year.

Concern surrounding the shipping pace continues to grow. We think that it is unlikely that the USDA will further enhance its export projection until such occurs. The currently projected 14.8M bales leaves 2017/18 US ending stocks near 5.5M – 6M bales, which are decidedly bearish figures.

The USDA’s first S&D balance sheets in 2018 are scheduled to be released at noon EST on Jan 12 in the monthly WASDE report. This report should feature some truing of acreage based on the latest certified acreage and insurance data although we do not expect revisions to be significant Vs what the USDA has used for planted and harvested area in 2017. An international consensus seems to be forming that aggregate world production will be projected significantly lower Vs the Dec report and that world aggregate consumption will be projected near the figure put forth in the most recent report (119.6M bales).

We will be conducting analyses on these items over the weekend.

Producers still holding old crop are likely not looking to us for advice at this point. Like riverboat gamblers, they’ve committed to the game, and their success or failure will hinge on finding buyers with insufficient inventory, or possibly insufficient quality inventory to meet late spring and summer shipping needs. We think call options are a safer way to make this play, but we can see the appeal of holding a small portion of the crop to take advantage of a scarcity of available qualities.  

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Similarly, we agree with other commentators that, given a potentially bearish 2018, it makes sense to price a small portion of one’s estimated production against a Dec contract in the mid-70s. However, the forward contracting basis appears to be lukewarm at present, with many merchants and buyers too busy wrapping up year-end business and shipping orders to get aggressive buying new crop. This will change in the next 6-8 weeks, but until it does, we think that out of the money put options are a good way to insure against an unexpected selloff below the 70-cent level.

For next week, the standard weekly technical analysis for and money flow into the Mar contract remain bullish; but the market also remains in a technically overbought condition. However, next week will likely be framed by position adjustments ahead of the WASDE report’s release. It certainly seems plausible that specs could look to book significant profits ahead of the WASDE report’s release, which has produced more than a few surprises over the last year.

Have a great week!

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