Rose on Cotton

March 10, 2019 4:04 pm
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ICE cotton gave back 36 points for the week ending Mar 8, settling 73.49.  The Dec contract lost 28, settling at 73.50.  The July – Dec spread remains significantly inverted, which suggests merchants will likely offer US cotton aggressively.

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 incorrect, but we did not recommend trading this (or any) bias ahead of the WASDE report’s release.

ICE cotton trading was positively influenced over the course of the week by positive vibes regarding US – China trade negotiations and rumors of export business being accomplished.  On the downside, most seemed unimpressed by improved US export data and found the increasing value of US currency to be a stressor.  The Mar WASDE report generally received as neutral.

In its Mar WASDE report, the USDA held its domestic balance sheet unchanged, with carryout projected at 4.3M bales on July 31.  At the world aggregate level, consumption was projected slightly lower Vs Feb at nearly 123.6M bales while production was projected 440K bales higher at almost 118.9M bales. Given that the USDA will almost certainly lower its domestic projection estimate, as well as its estimate for India and (perhaps) Australia, we will stick by our proprietary S&D balance sheets.  USDA may be waiting until April to update its domestic figures when the annual ginning report is released.

US export sales were significantly higher for the week ending Feb 28 Vs the previous sales period at approximately 128K and 387K running bales (RBs) respectively.  Sales were again ahead of the average weekly pace required to match the USDA’s export projection while shipments just missed the pace requirement.  Sales cancelations were significant at nearly 43K RBs, more than 50% of which were attributable to China.

Still, we continue to hear that impressive export reports are in the offing over the near-term. These rumors are supported by the renewed aggressiveness of some major merchants to buy producer cotton and renewed pressure on warehouses to guarantee prompt shipment.

Domestically, significant rainfall is expected across most of The Belt over the coming week.  Rain across W TX would likely not be supportive for cotton futures. Further precipitation across the Mid-south and southeastern states could also be negative for cotton futures given the potential for delayed and prevented corn plantings.

For the week ending Mar 5, the trade held a futures only net short position of approximately 5M bales.  Managed money firms trimmed their aggregate net short position to approximately 1.7M bales, via the addition of longs and covering of shorts.  The spec net short position could provide fuel for market spikes.

Internationally, Bangladesh has reportedly petitioned the US government for tariff benefits on its textile exports in exchange for a commitment to increase its import quantity of US cotton.  The nation has also expressed interest in investing in spinning operations within the US.  The Cotton Association of India has reduced its estimate of 2018/19 production modestly Vs Feb to the equivalent of 25.6M 480lb bales Vs the USDA’s latest estimate of 27M bales.  In China, the government has reduced the value-added tax on imported items to 13% Vs 16% previously, and this may be at the root of this week’s rise in polyester prices.

This past week saw producers celebrating the stabilization of the May contract and the setting of a slightly improved range.  Our contacts reported a modest increase in recap sales, with renewed buying interest by major merchants adding to the incentive to sell.  While we do see the potential for rallies in the old crop, we continue to believe that the burden of additional storage will effectively neutralize the benefit of these rallies for most producers. Selling recaps on moves to or above 75 cents makes a lot of sense to us.

The new crop’s upside potential isn’t as rosy as old crop.  We’ve been laying out the reasons for weeks, and we continue to advise pricing/hedging 25-35% of your expected production on moves in the Dec contract to or above 75 cents.

For next week, the standard weekly technical analysis for the May contract remain bearish, with money flow turning supportive.  Traders will continue to closely monitor weekly US export data and news regarding US – China trade talks ahead of the annual USDA planting intentions report, scheduled for release on May 29.

Have a great week!

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This post was written by Louis Rose