The bulls have initiated a fresh streak in the winner’s circle with back to back weekly gains totaling 541 points (174 of those this week). Although the Mar contract did not take out last week’s pre-WASDE report high of 84.65, it also did not trade below the post-WASDE release low of 80.30. The Mar – May spread finished at (37) – well below full carry – while the old crop/new crop straddle remains staunchly inverted.
The week following the monthly WASDE report release is usually light with respect to fundamental cotton and economic data releases. This week was no exception, with the bulls being bolstered by relatively weak US currency and an announcement that India cancelled more than 300K bales (480lbs) of export sales amid a relatively slow arrival pace and quality issues.
Indeed, US export sales for the week ending Jan 11 (and this period does not include the aforementioned period of Indian sales cancellations) remained very strong at just below 290K running bales. Export shipments made yet another MY high of nearly 303K RBs, but still have yet to meet the weekly pace required to meet any of the USDA’s MY export projections.
The take-home is that the US has now shown that it can successfully market the 2017 crop at futures prices of just below 77.00 and on up through something less than 80.00, and this is not bearish. Given the steep inversion between old and new crop futures, look for sales to either be pushed out the door by the trade or, as much as possible, certificated against ICE futures.
With respect to the new crop, we are seeing some movement from producers as forward contracting options make a 70.00 net price possible. Several noted marketing gurus and merchants have recommended producers price 25% to 50% of their crop at this level, and while we think this is a bit aggressive, we certainly think 20% to 30% is a wise move.
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It is worth noting that a review of previous years’ producer prices shows that Jan rarely holds the high price for the new crop. Highs are more likely to come during planting season rallies, weather crises during the growing season or (less often) in the following winter or spring. We’re big fans of put options and insurance to lock in a minimum price this early in the season, but be sure you have a way to participate in rallies over the next 8-12 months.
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, we still believe that market will try to fill the overhead gap on the continuation chart between 85.18 and 85.32.
Have a great week!
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