The Mar contract traded lower on the week – barely managing to trade above last Friday’s settlement – en route to a 318 point weekly setback. Such often occurs when the specs have a formidable net long position and the index funds begin to either roll their longs forward or liquidate altogether. The Mar – May spread finished at (131), essentially full carry, while the old crop/new crop straddle remains inverted, but far less than at last week’s close.
Demand remains the darling of this market. After falling off the pace required either to sell or ship 14.8M bales be July 31 for the week ending Jan 18, total net sales against the current marketing year were around 313K RBs while shipments were the highest so far in 2017/18 at almost 318K RBs. Still the latter still fell well short of the average weekly pace required for the USDA’s target to be hit.
On the domestic supply side, USDA classing now stands at 18.5M running bales. Classing for the week decreased 149K bales to 446K bales with classing reported out of 226 gins which is down from last week’s 265 gins and down from a season high of 548 gins. Our pace of classing model now estimates total US production at 21.49M statistical bales. Market watchers continue to be alarmed on quality issues in regards to Texas cotton. To put those concerns into perspective, there have now been more than 2.8M bales of Texas cotton discounted for low micronaire, which is 35% of the state’s total crop.
The market appeared to experience a round of short-covering (most likely from recent shorts) after the export report’s release, nearly trading limit-up as it challenged the 80.00 level. But it was not to be. Mar is quickly running out of steam and there is next week’s WASDE report, scheduled for release on Thu, Feb 8 at 12:00 noon ET, to be taken into account before most specs will be comfortable adding new positions. To the contrary, it seems to us that they are more likely to book profits on rallies ahead of the report.
Unless export shipment figures for the week ending Feb 1 exceed 350K, or so, running bales (the USDA will see these number one day ahead of the rest of us) we do not expect its official export projection to be enhanced just yet. However, we think that it eventually will be increased. With the old crop/new crop inversion persisting, merchants need to either sell a multitude of bales to mills (and try to have them shipped by Sept 1) or certificate them sell them to the board, And, while ICE certificated stocks have increased over the last 10 days, the increase is far from dramatic.
We will spend time this weekend trying to forerun the WASDE report, but one thing is almost for certain – the USDA will not alter its domestic production estimate of around 21.26M 480lb bales from Jan. Occasionally, if the discrepancy between the final ginning report of the year and the Jan estimate is significant, the USDA will alter its production estimated in Mar or April. Alternately, they can wait for NASS to hand them the final official tally in May.
At this time, we’ll take the “overs” respect to the USDA’s current projection.
Unsurprisingly, forward contracting slowed this past week, with few producers eager to chase a falling market in January. We think this was wise, and continue to see the potential for several pricing opportunities between now and June. With any luck, producers will take the opportunity to review the basics of hedging with options and will have some long conversations with their insurance agent about minimum price guarantees.
On the spot side, producers still holding cotton are well aware of the micronaire issue with the Texas crop. Even with this week’s selloff, they continue to see a very friendly basis for higher quality cotton. While we’re not as enthusiastic as some commentators, we still see rally potential in the old crop. We see no reason to get in a hurry to sell, but will be mindful of the caveat that it is never a good idea to fall in love with your unsold cotton.
For next week, the standard weekly technical analysis for and money flow into the Mar contract remain supportive to bullish, but it is fundamental news that will likely drive the market next week. In addition to the WASDE and weekly export report releases, the National Cotton Council will release the results of annual planting intentions survey at 9:30 AM, CT on Saturday, Feb 10 at its annual meeting in Fort Worth, TX. A Bloomberg, to which we contribute, survey has estimated 2008 US planted area at 13.2M acres – we’ll take the “overs” on that one, too.
Finally, the Goldman, Dow Jones and other index funds will begin to either roll out of or liquidate Mar longs around the middle of next week. And, while this may enhance market volatility, we do not see this as a bullish factor.
Have a great weekend!
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