Rose on Cotton

March 3, 2019 6:47 pm
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ICE cotton posted a win for the week ending Mar 1, managing to settle near the top of its weekly range at 73.85.  The Dec contract gained 27, settling at 73.78.  The July – Dec spread remains inverted, which suggests merchants will likely offer US cotton aggressively; there is yet no evidence of an attempt to force carry into the market via the certification of US bales.  The May contract gave up 284 points in Feb.

Last weekend, our proprietary model (timely prediction available in our complete weekly report) called for a settlement that was to be near unchanged to lower Vs the previous Friday’s finish, which leaves us with a modest weekly setback.

The USDA will release its Mar WASDE report on Fri, Mar 8.  Although the usual public pre-report estimates have not been released yet, we expect the report to be neutral to supportive.

ICE cotton trading found support last week, despite a nearly universally bearish outlook from public sources, anemic US export sales and the lack of a trade accord with China.  Rumors of fresh business, on-call fixations and continued spec short-covering seem likely to be the factors underpinning the market.

US net export sales for the week ending Feb 21 were relatively disappointing at approximately 95K running bales (RBs). Shipments improved noticeably, although both sales and shipments were just off the average weekly pace required to match the USDA’s export projection.  Sales cancelations were substantial at nearly 115K RBs and were mostly attributable to China.

On the production side, W TX is expected to remain dry this week while cotton producing areas across the Mid-south and southeastern states are likely to see more precipitation.  With respect to the latter regions, it is and/or will soon be time to plant corn and any reduction in corn area due to wet soils could translate into higher than originally planned cotton acreage.  With respect to the 2018 crop, both USDA-RMA insurance data and weekly USDA-AMS classing data suggest that the USDA’s nearly 18.4M bale estimate of US production is too high.

For the week ending Feb 19, the trade continued to trim its aggregate futures only net short position, reducing it to less than 5M bales, mostly on short-covering.  Managed money firms increased their aggregate net short position to approximately 1.9M bales, mostly via the liquidation of longs.  By next Friday (Mar 8) the CFTC will again be in sync with the current market and we can again begin producing our weekly Commitments of Traders analysis and summary.

Internationally, the US and China are eyeing mid-Mar meeting to further discuss trade, this time (presumably) at President Trump’s Mar-a-Logo club/estate in FL.  March is normally the month in which China commences its reserve cotton auctions, but we have neither heard or seen any official news regarding this year’s official sales process.  China continues to buy cotton, just not from the US in any significant manner.  Elsewhere, meteorologists are forecasting a greater than 50% chance of at least normal precipitation occurring from the upcoming monsoon season.  Also worth noting, India and Pakistan – whose relationship is more often than not tenuous – came to blows this week after India used aircraft to attack a reputed terrorist camp in Pakistan.

Producers and the trade gathered in Memphis for the Mid-South Farm and Gin Show this past weekend, eager for news and perspective on the current market and prospects for the 2019 crop. Historically, the Gin Show has been a source for market moving news and rumors. Arguably the highlight of the weekend (at least for marketers and traders), has been the Friday Morning market update, featuring Joe Nicosia of Allenberg Cotton company – the world’s largest cotton merchant.

In years past, Nicosia has gone out on a limb, risking his reputation by making a strong directional prediction and encouraging growers to be bulls or bears. He took no such chance this year. Nicosia laid out 3 scenarios for the year ahead, covering a price range of 55 to 95 cents, primarily hinging on the progress and outcome of trade talks between the US and China. The Ag Market Network roundtable featured some lively discussion of the idea of US tariffs on imports on Chinese textiles coming into the US, exposing some personal/professional tensions between market gurus, but the conversation didn’t reveal information or perspectives not widely known before the weekend.

All of which is to say that a full weekend of seminars, conversations, and back room discussions left us where we were before the weekend with respect to marketing old and new crop. While there is a chance of a rally if and when we reach a favorable trade agreement with China, storage could easily negate the futures gains.  We continue to recommend selling old crop against moves to or above the 75 cent level, but see some merit in buying out of the money July calls.

Our new crop recommendations are similarly unexciting.  We recommend pricing 25-35% of estimated production against a Dec price of 75.00 or better and increasing that percentage to 50% if Dec moves to 78.00 prior to planting.  Should we get through May without significant weather problems, we will look to have at least 50% of estimated production priced and consider put protection on unfixed cotton.

For this week, the standard weekly technical analysis for and money flow into the May contract remain bearish.  Market participants will increase their attention to weather conditions as the US planting season approaches, measuring the recent US planting and production forecasts against weather forecasts.  Still, it will likely be the Mar WASDE report, the weekly release of US export data and any potential news/rumors regarding US-China trade negotiations that will hold the greatest sway over ICE cotton futures over the near-term.

Have a great week!

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This post was written by Louis Rose