Rose on Cotton: Bulls Pulled it Out; Export Demand Holding Strong

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The Bulls pulled it out this week, posting a 138 point gain to finish at 84.73 ahead of potential rains across West Texas. The Dec contract finally broke through and closed significantly above the 79.00 mark, which is technically very supportive. The old crop/new crop straddle strengthened considerably to 530 pts.  

Trading on the ICE this week was marked by a swift intraday downside movement to just below 82.00 on Mon and by today’s 191 point surge to a settlement at 84.73. The middle portion of the week was akin to watching the lawn grow. The surprising portion of Friday’s move, in our opinion, was the market’s strong performance ahead of potential weekend precipitation across West Texas. While it is true that expected accumulations have been curbed recently, we expected to see some downside movement (which occurred, but did not last) once initial short covering had transpired.

We’ll see what happens, but we’re rooting for producers that need to produce a crop on drought-stricken fields.

Demand for US cotton for export remained formidable for the week ending April 12. Total net sales were noticeably higher Vs the previous sales period while shipments were lower at approximately 295K and 371K running bales, respectively. Total sales against 2018/19 were large at nearly 230K running bales; sales against 2018/19 currently stand at a running total of approximately 3.2M 480lb bales.

We continue to project 2017/18 exports at 16.4M 480lb bales. Shipments will need to average around 406K running bales per week for the remainder of the current MY in order for our projection to be realized.

Internationally, news this week was relatively quiet. Northern India and Pakistan continue to grapple with droughty conditions as planting season gets underway while reserve sales in China continue to slow. China sold significantly less than 50% of the cotton it made available for sale this week.  

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For next week, the standard weekly technical analysis for and money flow into the July contract are bullish. Still, it may well be rains across West Texas (or lack thereof) this weekend that shape the majority of next week’s trading action. We continue to believe that the formidable on-call position held by mills could spark a sharp rally against the July contract prior to first notice day.

This week’s trading on the Dec contract was eventful, with a selloff, recovery, and a close two points off the 52-week contract high. It is important, however, to keep in mind the fact that we started the week at 78.89 and spent the week within a 153 pt range. Forward contracting basis is remaining consistent and competitive, with several companies making offers in what should be a profitable range for producers.

While our conversations with producers have been dominated by talk of dry conditions across Texas, merchant and broker conversations have focused on the continuing strong demand for US cotton on the export market, and that bodes well for producers with cotton to sell. So, while we continue to believe the 78-82 cent range is an excellent place to price up to ½ your expected yield, producers with 40-50% priced can likely afford to bide their time until the market breaks out of the low 80s or until they have a crop in the ground, whichever comes first.

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, click here.  

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