Rose on Cotton: Booking Slows – Also, Pondering New Cottonseed Program

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The May contract finished modestly lower on the week, giving up 47 points to settle at 77.16. The May – July spread finished at (96) while the old crop/new crop straddle remains significantly inverted at 250, which is strong incentive for merchants to expeditiously find homes for their inventory.  

Trading on the ICE was rather subdued this week. While it is true that China took Thursday and Friday off for annual Golden Week celebrations, the market still had to consider the National Cotton Council’s release of planting intention figures of 13.1M acres (we consider this neutral) and domestic production and world aggregate consumption figures of 19.42M and 124.8M bales respectively. The latter two, in our opinion, are bullish factors, as is the continued drought across much of the Belt – especially West Texas.

Mills have taken advantage of the recent price decline to fix a significant number of on-call commitments, but total and 2017/18 commitments were most recently reported at approximately 14.1M and 8.6M bales, respectively. These are supportive figures for ICE futures.  

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Total net sales and shipments for the week ending Feb 8 were off significantly Vs the previous sales period, but remained strong at approximately 368K and 343K running bales, respectively. Sales were in excess of 750% of the weekly pace required in order to match the USDA’s export target while shipments were just off the pace requirement. However, shipments over the three most recent sales periods have averaged significantly above the weekly requirement.

Regarding this season’s shipment pace, much has been made about the new mandate that requires truck drivers to have their hours automatically logged. This is apparently an issue for some older vehicles, and we are hearing from warehousemen and truckers that this is causing delays. There is no doubt that this has been (and continues to be) an issue for this season’s crop. Some see this mandate as a paradigm shift to slower and/or more costly shipments for cotton. However, we have much more faith in the ingenuity of Americans to circumvent the system than do these naysayers. It is likely that lines of code are (or already have been) drafted for testing regarding how to cheat the new electronic system.

Forward contracting continues to move at a glacial pace, which is not surprising given the fact that the Dec contract hasn’t broken out of the 74-76 cent range since Christmas, and the basis has remained steady with competing contracts generally clustered in a narrow range. Add the attention being paid to the new cottonseed program, and producers may be forgiven for not being in a hurry to price the 2018 crop. There is likely still time to see Dec move into the 76-80 cent range and price 30-50% of your expected yield. But keep in mind that as we move closer to June, those targets and percentages should be re-evaluated.

It’s hard to imagine anyone has missed the announcements, but National Cotton Council (among others) will be holding a series of webinars and conference calls this next week to discuss the new cottonseed program, base acres, and producer options. Given a relatively flat market, there’s little excuse not to take advantage of these opportunities. Check here or your local gin/coop/broker for more information.

For next week, the standard weekly technical analysis for and money flow into the May contract remain supportive to bullish, but it is fundamental news that will likely drive the market next week. Next week will be abbreviated per the observance of President’s Day on Monday. China will, for the most part, be out on holiday through Wednesday of next week while first notice day for the Mar contract occurs on Thursday, Feb 22. Traders will likely continue to monitor projected USDA-RMA crop insurance base prices and domestic droughty conditions. Friday’s export report (for the week ending Feb 15) is likely to again feature strong sales and shipments.

Further, we expect ICE certificated stocks to continue to accrue.

Have a great weekend!

Rose Commodity Group offers commodity data analysis, risk management consulting, and provides liaison services to the commodity industry. For more info on Rose Commodity Group, its partners, and the services offered, please visit:  www.rosecommoditygroup.com


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