The Mar contract again finished lower on the week, giving up 62 points to settle at 76.68. The Mar – May spread finished stronger Vs Feb 2 at (95) while the old crop/new crop straddle (July – Dec) finished the week at an inversion in excess of 300 points. The May contract is now the de facto lead month by virtue of having the greatest open interest.
The week featured the release of surging US export data and looser than expected USDA balance sheets. Going strictly by the numbers, the Feb WASDE report was neutral to bearish, but the export report was out-and-out bullish.
The Feb WASDE report featured higher US ending stocks, per the downgrade to the US export projection by 300K bales to 14.5M, with estimates of both production and consumption held unchanged (as expected) versus Jan. At the world aggregate level, expected ending stocks were enhanced 760K bales Vs Jan on marginally higher projected production and a modest downgrade to the consumption estimate.
Concerning the export report, total net sales were more than 410K running bales; shipments were a MY high of almost 463K running bales. Sales were nearly seven fold of the weekly pace required to match the USDA’s revised 14.5M bale export target, while shipments were well above the weekly pace requirement before the downward revision to the export projection became common knowledge.
In fact, shipments over the two most recent report periods (when averaged) were significantly ahead of the weekly pace requirement.
All of this is to say that the USDA’s downgrade in its expectations for 2017/18 exports is puzzling. The demand underlying the market is very strong – sales against the current marketing year are unquestionable, with sales against the upcoming marketing year approaching 1.8M bales.
Given the recent impressive quickening of shipments, the USDA’s timing seems off.
There are those that argue that a larger-than-average upcoming harvest in Australia and the slowing of Indian domestic demand will curb the need for US exports. However, given the old crop/new crop straddle inversion, merchants will be pushing bales out of the door while simultaneously increasing the level of certificated stocks. The latter should cause prices to drop. Still, the trade has demonstrated that it can market bales well above the 80.00 level, basis Mar, so why would they be challenged (with projected world consumption of around 120.5M bales) to move bales below the 75.00 mark?
It seems what the USDA has predicted (likely an unintended consequence) is a market squeeze of long specs that will allow the trade to pocket enough cash to afford the carrying of a significant portion of the 2017 crop into the 2018/19 marketing year.
We think that exports against 2017/18 will ultimately prove to be around 16M bales. We’ll see.
The National Cotton Council (NCC) will release the results of its 2018 planting intentions survey at approximately 8 a.m. to 9 a.m., CT tomorrow, February 10. The annual Bloomberg survey showed an average expectation for planted area in 2018 to be near 13.2M bales, but, as we said in this space last week, we’re taking the “overs” on the pre-release estimate.
The most interesting international news that came across our desk this week was an announcement that Russia intends to join the world cotton producing community. Russia says it will return to cotton production in 2018 and plans to sow around 2.5K acres for the upcoming growing season.
Longer-term, the largest country of the former Soviet Union has suggested that it plans to eventually produce enough cotton to feed its own spinning industry. Russia has an estimated 550K acres suitable for the production of cotton, with its domestic consumption currently projected at around 325K 480lb bales in 2019.
More on Cotton
Predictably, forward contracting slowed substantially this past week with the Dec contract not high enough to inspire new sales, but not low enough to produce any panic selling. As we get closer to planting season, our enthusiasm for having 20% to 30% of expected yield priced will grow, but we think that time is still on producers’ side, and that Dec could easily produce a 200-500 pt move up before settling in to a bona fide spring weather market.
Factors that should be on producers’ radar next week obviously include the reaction to Saturday’s NCC announcement, but Washington bears watching as well. As of last night, cotton was restored to Title I of the farm bill, but the details haven’t yet made it to the coffee shop. Similarly, efforts to fix the section 199A/Co-Op tax provision weren’t finalized in yesterday’s legislative fireworks, so there is still potential for changes that could have a significant impact on your bottom line.
Best bet is to keep your accountant, your attorney, and your friendliest legislator on speed dial for the next few weeks.
For next week, the standard weekly technical analysis for and money flow into the May contract remain supportive. Index fund rolling will culminate next week, with the market then turning its focus for Mar to first notice day and potential deliveries of accruing certificated stocks.
Have a great weekend!
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