Rose on Cotton – Cotton Market Continues Higher Despite Lackluster Export Data

November 14, 2021 4:55 pm
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Louis W. Rose IV and Barry B. Bean

The ICE Mar cotton contract gained 184 points on the week, finishing at 115.08, with the Mar – May spread inverted at 173.  Last weekend our models predicted a finish on the week that was to be near unchanged to lower Vs the previous Friday’s settlement, which proved to be incorrect.

The Mar contract was higher on index fund rolling, a reduction in ICE certificated stocks to near zero, and strength in grains, crude oil, and other energy products.  The market’s technically bullish condition also likely helped move the market higher, despite another lackluster weekly US export report.

In the Nov WASDE report the USDA projected 2021/22 domestic carryout 200K bales higher Vs Oct at 3.4M bales, just below our expectation.  The adjustment came per modest increases of the US yield and production estimates to 890lbs/acre and 18.2M bales, respectively.  USDA continues to officially hold 2020/21 exports at 16.37M bales despite USDA-FAS only reporting 16.03M bales shipped for the previous marketing year. 

Aggregate world carryout for 2021/22 was projected slightly lower Vs Oct at 86.93M bales, contrary to most expectations.  Production was estimated 1.5M bales higher Vs Oct on enhancements to the projections of production across the African Franc Zone, Australia, Brazil, and Pakistan.  USDA did not lower expected Indian production per the current pink bollworm infestation.  Consumption was estimated 700K higher at 124.1M bales, mostly on enhancements to Indian and Pakistani use, despite numerous reports from both nations that their mill use has fallen off a cliff given current market prices. 

While USDA has lost some very good personnel over the last decade, the work of the current group has, at times, been seriously questioned.  We are among those who have questioned their thinking, especially with respect to consumption modeling/decision making.

We continue to monitor the level of ICE certificated stocks, which are now effectively zero.  We do expect cotton to be certificated, but logistical issues continue to plague domestic shipping.  This situation is only exacerbated by the lateness of this year’s crop, and delays in classing and processing.  Despite the late crop, quality has remained very strong.

For the week ending Nov 7, the US harvest was estimated at 55% complete, up 10 percentage points on the week (for the second consecutive week) and Vs a rolling 5-year average of 57%.  Harvest progress was again a bit higher than we had expected.  We think Monday’s report will likely relay strong harvest progress. 

On the production side, the Mid-south is likely to see some shower activity over the coming week.  Producers across the balance of The Belt are likely to see fine harvest conditions.

Net export sales and shipments were lower Vs the previous assay period at approximately 135K and 99K RBs, respectively.  The US is 59% committed and 15% shipped Vs the USDA’s 15.5M bale export projection.  Both sales and shipments were well off the weekly pace required to meet the USDA’s export target.  Sales are dramatically ahead the average expected pace for this point of the season while shipments are modestly off par with the historical expectation.  China was again responsible for the majority of new crop sales.  Cancellations were modest at almost 15K RBs.

Internationally, China has announced that it will make an additional 600K MTs (~2.75M 480lb bales) available for release from its strategic reserve over the coming year.  One wonders if this is simply a maneuver to encourage the nation’s domestic prices to move southward.  Worth noting is that there is doubt regarding overall world offtake for 2021/22, USDA made no changes to its projection of China’s mill use in the Nov WASDE Report, and there have been noted concerns over consumption potential amid China’s energy crisis.  The nation’s energy crisis, which has forced shutdowns and slowdowns in many industries across the nation, is yet another factor in our lower estimates of aggregate world consumption Vs USDA.

In other news, the cotton industry in Uzbekistan (sanctioned many times due to the use of forced labor in its harvesting operations) has privatized its entire industry Vs its former government-controlled model.  The central government has retained land ownership, but this too could change over the longer-term.  Longer-term, this move could increase the nation’s competition with the US (and other nation’s) for export business, which is the nation’s primary use of raw cotton.

CFTC data for the week ending Nov 9 will not be published until Monday, Nov 15, per this week’s Veteran’s Day holiday.  The same applies to weekly classing data from the USDA.

For this week, the standard weekly technical analysis for and money flow into the Mar contract remain bullish, with the market approaching overbought, per some metrics. Harvest pressure, economic data releases, and activity in outside markets are likely market-moving factors for the coming week.

Our advice to producers remains consistent for the short term. We don’t see a downside to selling cotton at current levels, and forward contracting 10-20% of 2022 crop against a Dec22 price of 90 cents or above is a historically safe strategy.

Have a great week!

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This post was written by Louis Rose