The fundamental story line has been altered somewhat this week with the bulls turning out winners on both the Dec and Mar contracts. Dec and Mar gained 157 and 55 points, respectively, as the Dec – Mar spread made a nearby bullish move from near flat to a 102 point inversion. One wonders when carry will again be a feature of our market.
Demand has remained very strong for old crop US bales and is simply outstanding against the marketing year commencing on Aug 1. Over the last fortnight the US has sold nearly 1.4M 480 lb bales against 2016/17 and 2017/18 combined.
Demand is strong, with cotton obviously having value at prices significantly greater than where Dec has recently been consolidating.
Enough said.
On the supply side, the USDA has estimated total area committed to cotton at 12.06M acres, off nearly 200K acres vs the Mar 31 projection – and a near perfect match to our 12M acre forecast.
We get lucky, sometimes.
Although I have not yet completely updated our balance sheets, it certainly looks as if the US is more likely to log total production nearer to 18M than 19M bales.
With respect to US production and crop development, the major news event of the week was the multi-million dollar rains across West and Central Texas. As forecast, widespread rains and thunderstorms moved across Texas over a 4 day period bringing a much needed reprieve from scorching heat, drought and high winds. Accumulations of 0.5 to 3 inches were recorded over a large portion of TexasΆ cotton acreage.
For many, the moisture was a timely blessing while others were less fortunate, receiving too little, too late. Sources continue to report abandonment of non-irrigated acres on fields that did not receive sufficient moisture to establish viable stands. Additional moisture will be needed in the not-too-distant futures as conditions have once again turned hot and dry over the region.
The Midsouth and Southeast received a much needed break from the excessive rains this week (although it is raining as I pen this) and are slowly drying out, allowing field work to resume.
Internationally, reports of strong mill demand abound out of southeastern Asia. On the production side, The Cotton Association of India reduced its projection of the nationΆs 2016/17 production to 26.25M 480 lb bales. Projections of 2017/18 production are mostly within the 29M – 30M 480 lb bale range.
In China, several locations within the eastern provinces continue to report a need for rain.
With the positive response to the planted acres report, producers could be looking at yet another bite at the apple over the coming week. Given that the forward contracting basis has remained steady, it is hard to come up with a good argument not to price cotton if Dec moves to the low 70s. Many merchant offices will be operating with skeleton crews on Monday, with offices not likely to be 100% staffed until Wednesday. We think Thursday and Friday could offer pricing opportunities.
Beyond that, producers should mark the July 12th WASDE report release on their calendar and check the Lubbock weather on a daily basis. WeΆre in a weather market, and abandonment will tell the tale from this point forward. It is worth noting that at the close today, at the money Dec puts were just over 300 pts. We think that looks like a good insurance policy.
For next week, the standard weekly technical analysis for and money flow into the Dec contract remain bearish, but the market is much less oversold than it was at this time last week. Next weekΆs trading will be framed by an expectation for another round of strong US export data as traders and analysts begin to update their balance sheets with various permutations of projected abandonment levels and yields.
On the whole, we think it has been an encouraging week.
