Despite this being a trading week concluding business on Friday the 13th we think that ICE cotton futures performed about as well as could be expected. Given the USDA’s latest balance sheet adjustments, generally good weather conditions for planting in the northern hemisphere and for harvesting below the equator and ChinaΆs successful (so far) sales of its reserve stocks, it could have been a lot worse. July gave up 121 points on the week while Dec was set back 86.
Well, it was “swing and a miss, strike one” for us with respect to prognostications for the USDAΆs initial 2016/17 balance sheet. A sizeable expected reduction in US world carryout for the upcoming marketing year notwithstanding (how bullish can projected ending stocks in excess of 96M bales be considered?), the May WASDE report was bearish. US exports were slashed, both old and new crop estimated, and projected ending stocks were put forth at 4M and 4.7M bales respectively. Given the most recently released export data, the USDA is looking pretty smart.
We had thought that the old crop/new crop inversion would incentivize merchants to push stocks into the pipeline. However, adding 500K bales to the export estimate with less than 3 months to go in the marketing year tends to punish the spread. Additionally, ChinaΆs reserve stocks are flying off the shelf – nearly 1.2M bales of off-take since May 3 (about 70% imported stocks).
Still, a fair amount of the increase in the estimates of US stocks must have been correctly anticipated by many, as the market did not plunge following the WASDE reportΆs release. This is at least partly attributable to the discounting of the USDAΆs US production projection of 14.8M bales (USDA was bound to us a 9.56M acre figure from the Mar 31st planting intentions report) given the current run in soybean prices.
I would like to say that the USDA is flat-out incorrect about its thoughts on US export demand, but that still doesnΆt leave us with a base hit on forecasting as the 2016 crop season gets underway. WeΆll “windex” the crystal ball, polish the surface of the Ouija board and, maybe, switch to a new brand of tea before the June report comes around.
So – where does that leave a producer with a stand of unsold cotton coming up in his fields?
For the moment, it looks like the summer marketing doldrums have hit early. In the absence of a major weather event or surprise announcement from Asia, thereΆs no real reason to expect Dec cotton to trade far from its 60-63 cent level in the coming weeks, and at that level, thereΆs no incentive to book cotton.
WeΆll leave our previous advice in place – consider Dec puts on any move to or above 65 cents, touch base with your local buyer every week or so to see if contracting offers have gotten more interesting, and focus the majority of your attention on production until the weather or news give you a better opportunity.
For next week, the standard weekly technical analysis for the July contract remains supportive while money flow is moving in the opposite direction. The export report for the week ending May 12 holds the potential to be the best that we have seen in some time, but it will likely not be enough to break out of the current trading range.
Have a great weekend!
