Rose on Cotton: Explosion of Gains on July and Dec – Keep an Eye on the Smart Bulls

©Debra L Ferguson Stock Images

ICE cotton futures exploded from a near- to medium-term consolidation phase to finish the week with the July and Dec contracts gaining 240 and 98 points, respectively. The Dec contract finally broke through – and closed significantly above – the 80.00 level, which is technically bullish; ditto for July in making new contract highs. The old crop/new crop straddle strengthened considerably to 633.  

Trading on the ICE this week lacked the sporadic weakness seen over the last fortnight, with the aforementioned surge the greatest defining point of the week. We think that anticipation of significantly lower projected US ending stocks for the current marketing year and a significantly to much lower projection of both world aggregate and domestic 2018 production (Vs figures put forth at the annual Ag Outlook Forum in Feb) were the largest factors behind the market’s late week strength.

The USDA will release the May WASDE report on Thursday, May 10 at 12:00 PM, ET. The May report contains the initial official balance sheet for the new crop.

Demand for US cotton for export continued to be seasonally strong for the week ending April 26, despite total net sales against the current marketing year being off significantly Vs the previous sales period at approximately 201K running bales. Shipments were higher Vs figures put forth last week at 445K RBs. Shipments continue to eclipse the weekly pace required in order to match the USDA’s revised 15M bale export target. Total sales against 2018/19 were again large at nearly 300K running bales; sales against 2018/19 currently stand at a running total of approximately 3.8M 480lb bales.

Cotton – Southeast – Planting Starts In Earnest, Full Speed Ahead- AgFax Southeast Cotton   5-2

Cotton – Delta – Spring Has Sprung, Planters Rolling – AgFax Midsouth Cotton   5-2

Cotton – Southwest: The “D” Word is Back; Weeds Cranking Up – AgFax Southwest Cotton  5-2

We continue to project 2017/18 exports at 16.4M 480lb bales; shipments will need to average around 400K RBs per week for the remainder of the current MY in order for our projection to be realized.

Internationally, Northern India and Pakistan continue to endure droughty conditions, with sowing across Pakistan reportedly advancing at a very slow pace.

In economic news, the US Dollar Index continued to surge this week, despite a mid-week announcement that interest rates were to be held unchanged until June. Still, the market seems to heavily anticipate a rate hike in June, and The Fed did nothing to quell such notions in its May post-report statements.

Producers finally got their close above 80 cents on the Dec contract, giving many market gurus an added spring in their step. Continued weather issues across the US cotton belt and strong exports have given the Bulls incentive to continue their slow march to the low-mid 80s. We will watch Monday’s trading for any indication of how the market will respond to taking out a psychological benchmark, but expect to see Dec trade another 1 to 3 cents above Friday’s close.

More on Cotton

If we are correct, and we see a Dec of 82 or 83 cents in the next several trading sessions, we believe this would be a fine time to have at least 50% of your estimated crop priced. While bulls will get ever more bullish as prices move north, smart bulls will be taking advantage of the rally from a hedged position. This is a fine time of year to own call options.

For next week, the standard weekly technical analysis for and money flow into the July contract are bullish, with the market approaching a weekly overbought condition. Still, it will likely be the WASDE report and continued weather concerns (or the alleviation thereof) that most influence next week’s trading action. Monday’s weekly crop progress report should confirm significant sowing progress across the Mid-south and the southeastern states for the week ending May 6.

Have a great weekend!

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