Rose on Cotton: Foreign Demand Excellent; Crop Weather Tough Everywhere

Photo: Nick McMichen

The July and Dec contracts posted significant weekly wins (for bulls and producers) gaining 193 and 214 points, respectively. The old crop/new crop straddle weakened just a bit to 412.  

ICE cotton futures struggled early this week, but wound up with an explosion to the upside, despite a forecast that calls for significant rains across West Texas beginning Saturday evening.

Foreign demand for US cotton remains seasonally excellent, despite being lower Vs the previous sales period. Shipments continue to eclipse the weekly pace required in order to match the USDA’s revised 15.5M bale export target. Total sales against 2018/19 stand at a running total of almost 4.25M 480lb bales.

We continue to project 2017/18 exports at 16.4M 480lb bales; however, the current rate of shipments suggests that this figure could ultimately prove to be conservative.

Internationally, weather conditions across major cotton producing regions remain troublesome. Droughty conditions persist across northern India and Pakistan, with sowing in the latter (Punjab state) at far less than 50% complete, with the optimum planting window having closed on May 15. News out of China relayed that unseasonably cool temperatures, heavy rains, high winds and blowing sand may have significantly damaged the crop in Xinjiang, the nation’s largest cotton producing region.

In geopolitical news, officials from North Korea have balked and condemned military exercises between the US and South Korea and further stated that it was no longer interested in negotiations with the US if the sole purpose was denuclearization of the Korean peninsula.

It is difficult to be astonished at such news.

For producers, the question is no longer “are you bullish?”, but rather “how big are your horns?” Bears who cited the market pull back on May 7 as proof we’d seen the highs on the Dec contract got a series of lessons on this week and were remarkably scarce by week’s end.

May and June are traditional months for weather markets, and this years hasn’t disappointed yet. As noted above, both China and India are off to a rough start this year, and US producers are complaining of soggy fields in the north and drought in the high plains. It’s hard to find a coffee shop full of happy farmers anywhere cotton is grown.

To be fair, however, this is true most years, regardless of planting conditions.

We won’t fight the tide of growing new crop bullishness, and can cite as support the combination of supply concerns, increasing demand and the likelihood that long July positions will roll to Dec. Any one of those would be sufficient for a floor, and any two of those create upside potential. If (always a dangerous word) weather conditions don’t become more favorable, demand and offtake remain strong, and nearby longs do roll their positions to Dec, arguments for 85 to 90 cents gain credibility. But a week of favorable weather, an unfavorable trade negotiation, or an exodus of spec $$ to other markets could cap our market in the mid 80s, and potentially return us to the mid-high 70s.  

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Given that, being 50% priced between 82 and 85 cents continues to make excellent sense. Being contracted past 50% and owning Dec call options makes even more sense.

For next week, the standard weekly technical analysis for and money flow into the July contract remain bullish, with the market again approaching overbought territory. Monday’s weekly crop progress report should again confirm significant sowing progress across the Mid-south and the southeastern states. Finally, on-call data suggest that strong potential for market spikes against the July contract remains in force, with scheduled rolling of index fund net long positions to commence on May 30.

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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