Rose on Cotton – Cotton Market Continues to Grind Higher, Despite Numerous Negative Factors

November 21, 2021 9:13 pm
Published by

Louis W. Rose IV and Barry B. Bean

The ICE Mar cotton contract gained 135 points on the week, finishing at 116.43, with the Mar – May inversion slightly weaker at 165.  Last weekend our models predicted a finish on the week that was to be near unchanged to higher Vs the previous Friday’s settlement, which proved to be correct.

The cotton market continued to grind higher, despite another round of weak US export sales data (combined with a continuance of abysmal shipping figures), strong US harvest progress, and a nearly 1% increase in the US Dollar Index, on high domestic prices in China and a lack of ICE certificated stocks, which currently stand at less than 400 bales.

For the week ending Nov 14, the US harvest was estimated at 65% complete, up 10 percentage points on the week (for the third consecutive week) and Vs the rolling 5-year average of 64%.  Harvest progress was again a bit higher than we had expected.  The harvest remains behind schedule across much of the Mid-south, a region in which producers normally endeavor to be finished by Oct 31.

With respect to US production, the Mid-south is likely to see some rain over the coming week, which will likely delay remaining harvest operations.  Producers across the balance of The Belt are likely to see a continuance of mostly decent to fine harvest weather.

For the week ending Nov 18, the USDA classed more than 1.26M running bales (RBs), of which more than 86% are deliverable against ICE contracts.  Quality continues to hold up very well.  The cumulative total for the season is now nearly 6.2M RBs (35% of expected production), with more than 85% tenderable. 

Net export sales were slightly higher while shipments were lower Vs the previous assay period at approximately 157K and 84K RBs, respectively.  The US is 60% committed and 15% shipped Vs the USDA’s 15.5M bale export projection.  Both sales and shipments (especially shipments) were 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 off pace with the historical expectation.  Vietnam (mostly), China, and Turkey were responsible for the majority of new crop sales.  Cancellations were negligible.

Internationally, Conab has lowered its projection of new crop Brazilian production to the equivalent of 12.17M 480lb bales, or well below the USDA’s latest projection.  Conab has projected Brazilian cotton acreage 9.3% higher for 2022 Vs 2021.  In other news, we have both read and heard reports that the denim industry is now being particularly hard hit by the cotton market’s rally, and this does not portend well for our market.

For the week ending Nov 16, the trade significantly increased its futures only net short position against all active contracts to approximately 17.4M bales; large speculators increased their aggregate net long position to almost 8.6M bales.  Managed money firms continue to keep their outright shorts at an alarmingly low level and are holding them at around 55K 480lb bales.  Such could lead to quick (and potentially lasting) market breaks, especially if an increase in certificated stocks underlies a market break.

For this week, the standard weekly technical analysis for and money flow into the Mar contract remain bullish, with the market overbought.  The upcoming holiday weekend will likely lead to slower volume, which can enhance market volatility.  The level of ICE certificated stocks should be continuously monitored; large increases should serve as a signal to specs to enhance exit plans.

Worth repeating for emphasis: producers with unpriced old crop should pay close attention in the upcoming week.  Thanksgiving, Christmas, and New Year’s weeks tend to either see flat markets or see extreme volatility.  The combination of shortened trading hours, key personnel away from their desks, and the opportunity to “hide” large volume trades from public view for 48-72 hours can inspire moves both before and after the holiday break.  Disciplined marketers will consider this potential and have their market orders in well before they leave to eat turkey and debate politics with the in-laws.

New crop pricing remains attractive with the Dec22 contract in the 90s, but few would advise pricing more than 10-20% of estimated production at this time.  Two camps are holding sway in long term views; the bulls continue to argue that pandemic recovery and improvements in supply chain logistics will continue to inspire strong demand, which combined with the high cost of fertilizer could inspire rallies 10-30 cents above current levels.  Bears, on the other hand, see a much longer recovery, political and economic instability in the US and China, lingering supply chain problems, and a resurgence in polyester/microfiber use keeping prices under a dollar, potentially much below.

Given that our crystal ball is a little foggy, we still see 10-20% priced between 90 and 95 cents on the Dec22 contract as a wise move and we are doing the same with our own personal cotton.

Finally, no commodity column would be complete without acknowledging the potential for a Government Shutdown on Dec 3rd.  We reasonably expect the normal partisan brinksmanship to build tension until sometime on the afternoon of the 2nd, and for normal operations to continue/resume on the 3rd, but we will be keeping a close eye on negotiations.  Readers may recall that during the last extended shutdown (2018-2019), the CCC was not considered an essential function, and a substantial portion of the US cotton crop was effectively frozen for 35 days, with FSA offices barred from processing cotton either into or out of the loan.  Farm Bureau and National Cotton Council have since lobbied the relevant offices to be sure the CCC is considered an essential function if the government shuts down again, but it might be useful for cotton producers to remind their legislators the importance of cotton moving into and out of the loan in a timely fashion, and the significant impact of that movement on the regional and national economy.

Have a happy (and safe) Thanksgiving!

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    This post was written by Louis Rose