Rose on Cotton

February 24, 2019 3:14 pm
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ICE cotton recovered most of its losses for the week ending Feb 15, with the May contract picking up 115 points to finish at 73.01.  The Dec contract gained 71, settling at 73.51.  The July – Dec spread remains inverted, which suggests that USDA projected carryout for 2018/19 will tighten VS the most recent figure proffered 4.3M bales.

Last weekend, our proprietary model (timely prediction available in our complete weekly report) called for a settlement that was to be near unchanged to higher Vs the previous Friday’s finish, which proved to be correct.

ICE cotton trading found support last week from positive notes from and encouraging statements by President Trump regarding the most recent round of US-China trade talks.  Rumors of fresh business and on-call fixations, spec short-covering and the market’s oversold condition also likely lent support to ICE futures.  Still, disappointing figures put forth on a USDA export report covering a six-week period ending Feb 14 and bloated projections of US planted area and production in 2019 curbed market optimism on Friday.

We said in this space last week that we expected the USDA’s initial projections of US planted area and production at the Ag Outlook Forum to be more conservative than those put forth on Feb 9 by NCC – and they were, but not by much.  USDA projected total domestic planted acreage and production 250K acres and 200K bales lower than NCC.  At the world aggregate level, production is expected to slightly exceed consumption, with carryout for 2019/20 projected 1M bales higher Vs the USDA’s Feb report at 76.5M bales.

We think that the USDA’s figures were bold, given that most cotton producing areas of TX are rated as abnormally dry, with some locales being rated as droughty.  Conditions are excessively wet across the southeastern states and (particularly) the Mid-south.  And, while it is still too early to be overly concerned about weather conditions, TX and OK could use rain and producers to the east are anxious to do some field work.

On the other hand, with the southern corn planting window quickly approaching, any shortfall in expected corn acreage could easily be shifted to cotton.

US net export sales and shipments for the six-week period ending Feb 14 were less than generally expected at approximately 1.02M and 1.54M running bales (RBs) respectively.  Sales remained ahead of the average weekly pace required to match the USDA’s export projection while shipments continued to fall short of the pace requirement.  The US is 85% committed and 36% shipped Vs the USDA’s latest projection.

Cumulative net sales from just prior to Christmas through Feb 14 are approximately 2M RBs, which is not a figure to be taken lightly.

On the production side, USDA-AMS classing data and USDA-RMA insurance loss data continue to suggest that the US crop will ultimately prove to be shy of the USDA’s current estimated of 18.39M bales.

CFTC Commitments of Traders data (futures only) for the week ending Feb 5 showed that managed money firms added longs and covered shorts, trimming their aggregate net short position to less than 400K bales, while the trade added more shorts than longs in risk-on trading action. The trade was net short approximately 7.2M bales.

Internationally, China’s strategic reserve is now estimated at around 3M MTs (less than 14M bales) and this will be a supportive to bullish factor when/if a trade accord with China is reached.  ABARES has estimated Australian production at just below 2.7M bales (480lbs).  In Turkey, analysts are beginning to think that projected cotton acreage for 2019 is suspect due to poor returns realized in 2018 and the nation’s current level of inflation.

Producers with 2018 crop left to price had a brief opportunity to price cotton against May at 7515 on Thursday night, before the harsh news of lower than expected export sales quashed futures. Merchants and brokers throughout the belt were thrown into a frenzy trying to recalculate the spot basis and handle panic sales by producers who throwing in the towel.  Friday’s recovery from the initial reaction to the report does offer some hope and continuing optimistic uncertainty with regard to negotiations with China should allow the May contract to continue to trade a range in the low 70s in the short term.  It is hard to make an argument against selling 2018 crop against any move to or above 75 cents, and this week’s trading should reinforce the notion of trading discipline and GTC orders.

Similarly, it is hard to make an argument against selling 25-35% of new crop against a Dec contract of 74.00 – 75.00 cents, or better.  There will almost certainly be weather related rallies in the next several weeks and, as said above, neither wet conditions in the Southeast and Mid-south nor dry conditions in West Texas are setting producers up for an ideal planting season.  Once again, standing offers with your broker are a good way to practice trading discipline and making certain one is in position to take advantage of midnight rallies.

For this week, the standard weekly technical analysis for and money flow into the May contract remain bearish with the market’s oversold condition now somewhat mitigated.  Market participants will likely now commence measuring the recent US planting and production projections against weather forecasts.  And, as over recent weeks, news regarding progress in US-China trade negotiations will be closely scrutinized, as likely will happenings at the US-North Korea Summit in Vietnam.

The 67th annual Mid-south Farm and Gin Show will be held here, in Memphis, TN on Mar 1st and 2nd (Friday and Saturday) and opinions and presentations put forth in the Commodity Outlook sessions always have market-moving potential.

Hope to see you there.

Have a great weekend!

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This post was written by Louis Rose