USDA-RMA insurance base prices have been set for 2016 within the 61.00 – 64.00 range, depending on location, and this may help with planted area a bit, but the fact remains that cotton prices have retreated at a more rapid pace than have most competing crops.

Export data for the week ending Feb 18 was of no help with net sales against 2015/16 off nearly 67% Vs the previous period and shipments at well below 200K running bales.

Hence, China remains the largest “unknown” in our market with respect to release of its massive reserve stocks. And, such could very well keep many would-be long spec dollars away from the market.

And China is perfectly fine with the capitulation of ICE futures; if it were not, it would have altered the market’s course by now. We have discussed in this space before that ChinaΆs massive physical reserve hedge is not straightforward, as it involves many economic and social factors. And, if one has a short hedge and cannot move the physical, said entity is inherently better off if the market moves lower. Given the movement of cotton futures in China over recent weeks, they believe that the market will continue to move lower.

Although I was unexpectedly “out of commission” for the annual gin show in Memphis, an associate relates the following:

Joe Nicosia spoke to a full house this morning at the Mid-South Farm and Gin Show. While he didnΆt reveal any trade secrets, his talk did confirm several things weΆve discussed here and elsewhere in recent weeks. First and foremost, China is still decidedly in the market driverΆs seat as all eyes focus on Chinese plans to reduce their reserve to a more manageable level. Nicosia believes there is an announcement being polished that has market moving potential, and believes we will get this report in the next week or so, possibly in the next few days.

That said, China has been replaced by Bangladesh as the worldΆs largest buyer of cotton fiber. As Chinese cotton production has fallen off, raw cotton is moving to yarn mills in Bangladesh, Vietnam, and India before making it to Chinese mills to produce fabric. Given the increasing loss of cotton production infrastructure in China, this move has the potential to be a long term change with consequences for export trading strategies.

Nicosia also took a look at the increasingly tight supply of cotton outside China, noting that outside the reserve world supplies are as tight as they were in 2010. This builds support for the notion that the market could be particularly susceptible to weather rallies in 2016, and that the long range supply/demand situation is much friendlier at least as far out as 2020.

NicosiaΆs outlook wasnΆt bullish per se, but the reaction from ginners and merchants in attendance was decidedly positive.

An industry awash in bad news needs something positive on which to hang their hat, and they got that today. It is worth noting however, that Nicosia emphasized the multi-year nature of cottonΆs recovery, and he stressed the importance of conserving capital and conservative marketing.

Further, Nicosia recommended purchasing Dec 58.00 calls, with which we agree and that he sees 2015/16 ending stocks at 3.2M bales; we still think they have potential to move below 3M bales.

For next week, the standard weekly technical analysis for and money flow into the Mar contract remain bearish. The market could modestly bounce or consolidate over the near-term; however, we continue to think that an official announcement from China on the release of its reserve stocks is likely required ahead of any solid correction.

Have a great weekend!