The bulls returned to the winner’s circle this week in spectacular fashion, with the March contract gaining 367 points while trading as high as 664 points on last week’s settlement at its intraweek high. The Mar – May spread finished near unchanged Vs last week at (28); the old crop/new crop straddle is staunchly inverted at more than 600 points.
According to the January WASDE report, US growers are now projected to produce 21.26 million bales on 12.61M planted acres (11.35M harvested) with an average nationwide yield of 899 lbs. per acre. At this time, the feedback we are getting from across the US is that growers will increase cotton plantings for the 2018 season. As always, the price of competing crops versus the price of cotton along with the amount of cotton infrastructure available will be deciding factors as growers are prepare for another crop year.
Put another way, the USDA’s latest balance sheets continue to evince the bullish demand side of the equation (nearly 121M bales) and the rather comfortable position on the supple side of the function. Overall, world aggregate ending stocks were about where we expected them to be while domestic carryout was projected a bit tighter than our pre-report expectation and a bit looser than most expected.
It cannot be emphasized strongly enough that world aggregate and domestic carryout projections of around 88M and 5.7M bales, respectively, are not bullish figures.
Still, in our opinion, current market action is not inspired by fundamental factors, but more so by money flow, macroeconomic factors (e.g. weakening US currency on China’s curbing of US debt purchase and expensive equities) and from the burdensome mill on-call aggregate position.
Producers still holding cotton were the kings of the coffee shop this week as spot prices seat a season high. Their argument that the strong producer sales at harvest would inspire increased demand for spot cotton into the New Year appears correct, with both futures and spot basis levels solidifying the case.
New crop is a more complicated case. As noted above, the long-range numbers aren’t bullish, and it is easy enough to make an argument for a Dec contract that could run out of steam in the summer. In the meantime, however, the rally in the old crop should continue to exert an upward pull on the Dec contract, and it seems reasonable to expect prices 2-5 cents above current levels.
One caveat is that agents for one of the world’s largest cotton merchants are advising producers to hold off on booking cotton til later in the season. Whether one believes this advice better serves the producer or the buyer is the sort of thing that makes poker so interesting. We’ll be watching with interest, but for the time being, we believe it’s awfully early in the year to book more than 25% of estimated production.
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. At this time, it certainly looks as if the market will try to fill the overhead gap on the continuation chart between 85.10 and 85.32. Surely technical traders have this level in their sights.
Next week will be abbreviated as the market takes a break to observe the birth of Dr. King.
Have a great weekend!
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