Rose on Cotton: WASDE Projection is ‘Overly Optimistic’

Cotton seedlings. ©Debra L Ferguson Stock Photography

ICE cotton futures spent most of the week moving lower, most notably with the exceptions of follow through buying last Sunday evening and a late session rally on Friday, despite a WASDE report that many (including us) took as supportive to bullish, if not puzzling. Additionally, export data for the week ending May 3 positively sparkled. In the end, data suggested that specs simply wanted to book some profits ahead of a weekend that harbors a chance for some rain and showers across portions of West Texas.

The July and Dec contracts gave back 228 and 33 points on the week, respectively. Still, Dec settled above the 80.00 level, with the contract touching 81.50 on Monday. The old crop/new crop straddle weakened significantly to an inversion of 438 points.

Total net export sales against the current marketing year were near unchanged Vs the previous sales period at around 200K running bales. Shipments were higher at 516K running bales. Total sales against the marketing year to commence on Aug 1 now stand at a running total of more than 4M 480lb bales.

Not too shabby.

In its May WASDE report, the USDA put forth some odd figures and projections.

Domestic 2017 US production was reduced around 100K bales to 20.92M, even though the annual ginning report indicates that around 20.95M 480lb bales have already been ginned, and ginning is likely to continue into mid-June. For 2018, the USDA stood by its 19.5M bale domestic production projection despite the fact that the drought across West Texas has worsened. We view this prognostication as overly optimistic, at best.

At the world aggregate level, the USDA has projected that the world’s top two producers – India and China – will produce 28.5M and 27M bales, respectively, even as officials in both nations say that it is just not to be. China’s Ministry of Agriculture has estimated its country’s 2018 production at 25.25M bales.

The projection of world production at a record 125.44M bales is out-and-out bullish while the expected expansion of world ending stocks outside of China to more than 50M bales is bearish.

The USDA did raise its export projection for the current marketing year to 15.5M bales, as expected, even though nearly everyone who can do arithmetic can see that a 16M bale figure (at least) is now very likely.

While it is true that the USDA is considered the bellwether, the benchmark, the pace setter, etc. in all things ag commodity, it is equally true that the same adjectives could be used to describe Wayne Newton and Engelbert Humperdinck in the context of Vegas floor shows. But they have now lost much of their relevance. …

After breaking the psychologically important 80 cent barrier, the Dec contract looked a little bit like a puppy that caught a squirrel and doesn’t know what to do with it. We have heard from a few nervous producers who are worried that the market’s inability to move on to the 82-83 cent level could be a bearish sign, but we think these concerns are overdone. Continued strong demand, skepticism towards new crop projections from the USDA, and continued dry conditions in Texas are all maintaining substantial support for the Dec contract, and it is far easier to make a case for Dec at 85 cents rather than Dec at 75 cents. 

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Producers who have followed our advice to this point and are 30-50% booked can afford to focus on planting this next week. It is still mid-May, and there is more than enough time for a rally to provide these folks with the next pricing opportunity. Producers who haven’t priced any 2018 crop yet should consider getting to the 30-50% level. Basis and contract terms have remained friendly, and it’s easier to take chances with your profit margin than it is to take chances with your grocery money.

For next week, the standard weekly technical analysis for and money flow into the July contract remain bullish, with the market, for now anyway, safely out of overbought territory. Monday’s weekly crop progress report should again confirm significant sowing progress across the Mid-south and the southeastern states over the past week. Finally, on-call data suggest that market spikes for July remain likely.

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, please visit:  www.rosecommoditygroup.com.

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