Rose on Cotton – Cotton Finishes Slightly Higher in Volatile Trading Action, China’s Wish List is Unrealistic

July 20, 2019 5:53 pm
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Louis W. Rose IV and Barry B. Bean

It proved to be relatively volatile week for ICE cotton, with market weakness during mid-week sandwiched by strong upward moves on both Monday and Friday.  In the end the Dec contract finished 39 points higher Vs July 12 at 63.07.  The July – Dec spread strengthened to (91) which is less than full carry.

Last weekend, our proprietary model (timely prediction available in our complete weekly report) predicted a settlement that was to be near unchanged to higher Vs July 12, which proved to be technically correct, but effectively it was a push.

ICE cotton began the week with a bang, presumably on some initial spec short covering, but ran into difficulty on increased US – China trade tensions and weak export shipments, despite a marked improvement in new crop export sales.  Hurricane Barry also failed to live up to expectations and did not wreak as much havoc on the Mid-south crop as had been widely expected, despite pockets of significant localized damage.  Another increase in the USDA’s subjective weekly crop condition ratings helped to keep ICE futures on the defensive for much of the week.

China’s price for embarking on another round of face-to-face talks is steep.  They reportedly want all restrictions removed against Huawei, a technology company heavily suspected of state-sanctioned espionage, and a lifting of all tariffs currently levied against Chinese imports.  Renewed negotiations now seem much less likely than when the G20 summit brought optimistic news. It seems more likely that additional tariffs against goods from China will be imposed, likely accompanied by the requisite counter-tariffs from the Chinese.  We have not heard any news regarding a ruling by the central government on the China Cotton Association’s recent application for tariff waivers on US cotton, but we are hopeful.

Perhaps it is best that the US focus on becoming the residual cotton supplier to the world.  China will, in the not-too-distant future, be taking cotton off the world market to re-stock its reserves (if the trade war has not irreparably dampened textile consumption).  There should be plenty of places for US cotton to land in the long run.  Production concerns across Australia, India and Pakistan could hasten realization of such a scenario.

The US crop continues to progress, but the overall crop remains off its average developmental pace.  This is most evident across the Mid-south, but lateness is also notable across some portions of West Texas.  Showers are expected across most of the Belt over the coming week, with temperatures expected to be very conducive to cotton development.  The NOAA drought monitor currently shows only small patches of drought across The Belt

US export sales and shipments against 2018/19 were lower for the week ending July 11 Vs the previous sales period at around 55K and 321K RBs, respectively.  Shipments were approximately 78% of the weekly pace required to meet the USDA’s 14.5M bale export projection.  The US is 114% committed and 91% shipped Vs the USDA’s projection.  Sales against 2019/20 were around 219K RBs (a notable weekly improvement) with the total now nearly 4.5M 480lb bales; still.  Sales cancelations were modest at less than 20K RBs.

Internationally, Pakistan has officially lowered its production projection to the equivalent of 9.9M 480lb bales, which is still significantly higher Vs 2018.  The reduction was at the hands of lower than expected planted area, with recently noted locust infestations not mentioned in the report. Monsoon activity across India for the week ending July 17 was 20% below average.  Elsewhere, Conab has stated that it expects Brazil to export a record 1.5M MTs (6.9M bales) of cotton in 2019.

It was a rough week for producers holding old crop. Our broker and merchant friends tell us they are looking at stacks of recaps of loan cotton maturing in just over 10 days. Given that neither hurricane Barry nor trade negotiations were able to provide the 3-6 cent bump these equities need to gain a positive price, these producers will be facing some tough decisions in the next 10 days. Needless to say, if we should see a move to the mid-60s, producers should be ready to take advantage of any positive price.

If the world crop lives up to expectations and world consumption continues to cool, new crop appears headed to the mid-high 50s. That’s not good news for producers. With that said, markets seldom move in a straight line, and it is hard to find a major region that hasn’t already experienced potential yield or quality challenges this season.  We will be surprised if the Dec contract doesn’t test resistance in the mid to upper 60s at least once prior to harvest, and we encourage producers to price an additional 25% in the 65-68 cent range.

For the week ending July 16 the trade slashed it aggregate futures only net short position to less than 55K bales while large speculators increased their aggregate net short position to a record of nearly 4.75M bales, which leave provides the potential for a short covering rally on profit-taking or any unexpectedly bullish news.

For this week, the standard weekly technical analysis for and money flow into the July contract remain bearish.  The market will continue to closely monitor US and international weather conditions, US export business and worldwide demand.  A spec short covering rally seems to hold the greatest potential for upward movement over the near-term.

Have a great weekend!

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This post was written by Louis Rose