Rose On Cotton: Market Maybe Due For Correction – Stormy Spring Ahead?

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Trading on old crop ICE futures was relatively volatile on the week, with bears ultimately proving winners. The May contract gave back 167 points Vs last Friday.  The May – July spread weakened but remains near flat at (13). The old crop/new crop straddle weakened, too, but remains strongly inverted at 470. The Dec contract gave back 44 points for the week at 78.28.

Little fresh news was made known to the market this week, leaving traders to focus on upcoming annual reports (e.g. USDA prospective plantings) currency values, the potential for further trade tariffs and outside market action.

Still, the market did receive another strong round of export data from the USDA on Thu, albeit less impressive than that put forth last week.

Total net sales and shipments for the week ending Mar 15 were approximately 329K and 440K running bales, respectively. Sales continue to eclipse the weekly pace required in order to match the USDA’s export target while shipments were again well ahead of the pace requirement.  The US is nearly 100% committed and 49% shipped versus the USDA’s 14.M bale export target.

Shipments will need to average 323K running bales per week in order for the USDA’s current target to be realized. Sales against 2018/19 currently stand at a running total of almost 2.7M 480lb bales.

Merchants have continued to market old crop bales aggressively via attractive basis levels amid the market’s current old crop/new crop futures market inversion.

Internationally, China off-loaded approximately 447K bales of cotton during the first five days of its 2018 reserve auctions.  Overall, we see this as an indicator of continued strong demand and should serve as a supportive factor for ICE cotton futures.

Mixed Signals To Farmers

Once again, producers are receiving mixed messages on marketing their 2018 crop. Increasing consumption and off-take continues to fuel bullish sentiments, making a Dec contract in the low 80s seem more and more likely. Additionally, with no more than two negative closes in a row in the past 31 sessions, it is easy to maintain a default neutral-to-bullish expectation for any given trading day’s activity.

Cotton Commentary


On the other hand, the talk in Washington is increasingly bearish, with a number of sources warning of expected retaliations for the Trump steel and aluminum tariffs and recommending preparation for further trade war tactics. Combined with a market overdue for a correction, it could be a stormy spring.

We continue to see a strong argument to price 30-50% of estimated production on moves above 79, and see the potential for using the option pit to take advantage of the volatility we expect to see developing in the next 5-10 weeks.

For next week, the standard weekly technical analysis for and money flow into the May contract remain supportive to bullish.  The formidable on-call position held by mills remains a very supportive factor for our market, especially considering that few natural sellers of old crop bales remain in the market.  Traders will continue to focus intently on droughty conditions across W TX, OK and KS.

Have a great weekend!

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