Cotton posted gains on the week as the old crop May and July futures contracts traded within the 82.5-84.5 cent range and closed above 83 cents.
May was impressive as it moved through the fund long roll positions (sell May/buy July) and posted gains despite the selling pressure created by rolling positions to the July contract. In fact, the May contract is suggesting that the market is facing a price inversion. This means the nearby contract is higher than the next contract.
Mill demand for immediate delivery, the low number of certificated stocks, and the rapidly diminishing availability of quality are 3 reason given for May to invert over the July. Typically the nearby contract month would be less than the next month to account for carrying cotton a longer time period. Immediate demand is the typical reason for the market to invert. Yet, in this particular case the shortage of certificated stocks is also adding to the pressure of keeping May futures price higher than the July futures price. The new crop December posted a life of contract high of 78.97, three points higher than the previous high and recorded a settlement high of 78.91 cents.
Both May and July futures are suggesting that their respective highs have been established and that the market will fail on any attempt to move above the 86.00-86.50 cent level First notice day for the May contract is Tuesday, April 24; thus, its expiry is just around the corner. The delivery period could pull prices higher due to limited certificated stocks. Yet, fireworks are only expected after open interest is whittled down during the delivery period. Therefore, the July is set to become the lead month and pricing will, at week’s end, be focused on the July contract. As stated, July will have difficulty moving to a new high and will most likely spend most of its time between 81 and 85 cents.
The new crop December contract cleared the 78 cent barrier and moved higher all week. World demand, coupled with the realization that world plantings will not expand as in past years is behind the move to higher New York prices. Chinese acreage will fall some 4-5 percent. India, facing its worst yields since the introduction of Bt has indicated it will opt for more beans and legume crops in an effort to increase food production. Only the U.S., Australia and Brazil are looking at expanding plantings. This fits with the world carryover situation in that these are the three countries most often associated with the high quality production that is the type cotton that is in short supply around the world.
U.S. export sales slipped to a net if 180,300 RB on the week; 179.400 Upland and 900 RB Pima. Evidence of wide spread demand continues as some 20 countries were in the market for U.S. cotton. Shipments were exceptionally strong as the total exceed 500,000 RB. Upland exports were 499,600 RB and Pima shipments were 12,500 RB. This shipping rate helped USDA increase its estimate of exports to 15.0 million bales, but up only 2000,000 bales. This is likely nearly a million bales too low, but USDA has elected to ease shipments higher each month as opposed to forecasting for year end totals.
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Due to higher exports, USDA lowered its estimate of U.S. carryover stocks to 5.3 million bales. As we have said for some months U.S. carryover should fall between 4.2 and 4.7 million bales. USDA did lower its estimate of world ending stocks nearly 600,000 bales down to 88.3 million bales. Expect world ending stocks to fall much closer to 87 million by the end of the year.
The market is seeing more and more influence of the drought across the southern plains that has spread through the cotton area of Kansas, Oklahoma and both the High Plains and Rolling Plains. December futures established new life of contract highs and closing highs. Without moisture in the intermediate future, the New York December contract will continue to ease toward the mid 80s. Yet, as we have cautioned several times, the Memorial Day rain that “always comes” can take a dime out of the contract price. Don’t let the 78-79 cent price level get away without some price protections.
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