The bulls were again winners in an exciting week for longs and producers. In last week’s report, I said the markets bias would be near unchanged to a bit lower. I was wrong.
Despite the impending First Notice Day, the May contract was the star of the week, gaining nearly 350 points and propelling the May – July spread from full carry to (at times) a steep inversion. Analysts differ in their opinions regarding a potential taker of ICE cert stock against May, and I wrote yesterday that it looked to me as if there would certainly be one. I now see the disconnect between my brain and hands late at night — I should have said that it looked like there had been a potential taker of cert stock, but the contractΆs two week advance of 553 points may have inspired anyone that had planned on taking delivery to simply book profits or roll to July.
The July and Dec contracts gained 279 and 154 points on the week, respectively, while the July – Dec straddle remains staunchly inverted at 437 points.
Producers should interpret this as a sign to strongly consider either booking cotton or obtaining downside protection, for it is the markets consensus that cotton will be worth considerably less in the future than it now is.
Given that many producers have yet to put the first seed in the ground, and the fact that the basis has remained steady, Dec put options in the 150-300 point range look awfully attractive to us, putting a floor under prices and leaving producers still able to find a better basis or get enough of a stand to book an increased percentage of their crop.
US export sales and shipments for the week ending April 13 were significantly lower Vs the period ending April 6, but they were still quite constructive. The latest data released continues to illuminate the tightness of US old crop stocks. Our calculations show that only around 1.35M bales remained available for sale from the 2016 crop at the end of last week, with around 300K bales of this estimate currently certificated against ICE. Of the remaining 1M bales, around 540K are listed as committed on-call with the majority of the balance likely held by marketing cooperatives.
There simply is not a lot of free cotton to uncover in the country, although we may know where a little bit is hiding.
For next week, the standard weekly technical analysis for and money flow into the July contract remains bullish, with the market also remaining in technically overbought condition. The overall old crop supply and demand picture remains supportive to bullish.
If planting season goes smoothly, especially across the US, we expect that the July contract ultimately has some sever breaks ahead. After all, even if the spec gain control and push the market higher, at some point they will want to book those profits. And such (significant spec-on-spec trading) has historically meant sharply increasing volatility. But, we are not yet likely at that point, and it is not chiseled in stone that such a scenario has to come to fruition next week- or even a couple after that..
From a speculative perspective, we continue to favor selling rallies near 80.00 over the near-term.
Have a great weekend!
