Rose On Cotton: Reports, Demand Supportive – But Beware “Irrational Exuberance”

On The Whole, Reports Not Bearish

Bulls won in a large way on May over the holiday-shortened trading week, with the contract gaining 418 points to settle at 81.34. The May-July spread finished at (73) while the old crop/new crop straddle is strongly inverted at 470.

In its initial 2018/19 S&D balance sheets, released at this year’s annual Ag Outlook forum, the USDA projected 2018 domestic area at 13.3M acres versus the National Cotton Council’s (NCC) survey result of 13.1M and out initial projection of just below 13.5M acres. It seems that we are all in the same ballpark.

Still, USDA’s projected 2018 domestic production is at nearly the same level as NCC at 19.5M bales – the result of larger expected abandonment and lower projected yield in 2018 Vs 2017.

At the world level, the USDA projected production and consumption at approximately 117M and 123M bales, respectively.

This set of projections, in our opinion, is not bearish.

Demand Not Letting Up

Demand for US cotton for export continues to surge, with total net sales and shipments for the week ending February 15 of around 406M and 355K running bales, respectively. Sales against the marketing year beginning on Aug 1 now stand at nearly 2.1M 480lb bales.

These figures are also not bearish, although we would like to see shipments quicken – we think they will.

Producers can take heart in this development, but we’d caution against what Alan Greenspan would call irrational exuberance. The route  from 7600 to 8000 is a bumpy road, and there is little consensus that we will see a Dec of 80 or better in the short or mid-term. In the longer term, there are excellent fundamental arguments for a Dec well below current levels.

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Given this, we think it makes sense to price 30% to 50% of expected yield, and on call contracts are worth considering if the basis gets much stronger.

For next week, the standard weekly technical analysis for and money flow into the May contract remain supportive to bullish. China is slated to commence 2018 auction sales from its reserve stockpile next month, and results thereof will likely be closely scrutinized. Finally, we expect export data for the week ending Feb 22 to again be formidable.

Have a great weekend!

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