Louis W. Rose IV and Barry B. Bean
ICE May cotton gave up 135 points on the week to finish at 134.55, as the May – July inversion was effectively unchanged at 362. 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 incorrect. However, we did not recommend trading this bias due to the UDA’s annual Planting Intentions Report release. The Dec contract lost 106, finishing at 110.68.
The cotton market moved lower on weakening US export data (as prices have moved higher), index fund rolling, and the market’s overbought condition. The worsening drought across the West Texas region, less expected planted area Vs the USDA’s projection at Feb’s annual Ag Outlook Forum, and large mill on-call commitments likely offered support to the market.
The USDA has projected 2022 total US cotton area at 12.2M acres, off 500K Vs the Ag Outlook Forum and in line with our projection. Some believe acreage will be higher, given the rise in Dec prices since the USDA conducted its survey of producers. Maybe. Maybe not.
USDA also announced it expects soybean acreage to be 91M acres (also in line with our forecast) as rising prices of soybeans and nitrogen fertilizer pull acres away from both corn (89.5M acres) and cotton. In fact, nearly all cotton producing states are expected to plant significantly higher acreage in soybeans this season.
Still, what really matters is if/when it rains across West Texas. If everything were to suddenly turn favorable for production and if the Mid-south and the southeastern states can avoid weather issues late in the season, the US could produce as much as 21M bales; if it all goes south, it could be as low as around 13M bales. This is a lot of uncertainty.
If it does not rain significantly across West Texas within the next 8 weeks, other areas could boost acreage, especially if Dec futures move higher. However, given the competitiveness of corn and soybeans with cotton, we doubt there will be much new investment in cotton equipment and infrastructure.
We did have one serious issue with the USDA’s projections, and that is the 17% projected increase in cotton acreage for Missouri. It only happens if southern Illinois, for which USDA does not project planted area, dramatically increases their sparse acreage. Missouri’s acreage increase should be (and has historically been) highly correlated with average movements in Arkansas cotton area. We know the region quite well and we have no qualms telling you that acreage may increase 17K acres (not 17%) Vs 2021, but Missouri acreage of 385K acres is just not going to happen. If we see, as we did last season, serious planting delays, expect to see more soybeans and less cotton. Our own survey of Missouri ginners and producers suggests acreage between 325K and 350K acres, or within 5% of 2021 intended acres
USDA will release its April WASDE report on Friday, April 8 at the normal time. We do not expect major adjustments ahead of next month’s unveiling of initial 2022/23 S&D balance sheets. However, we think exports will be projected lower, adding to expected domestic carryout. Still, if the Texas drought endures, this will likely not have a major bearish effect on ICE futures.
Domestically, the drought across West Texas, Oklahoma, and Kansas continues to worsen even as portions of these areas received trace amounts of rain over the last week. Planting across the southern Delta could get underway this week, while we are a couple of weeks away from putting seed into the ground across the mid- and northern Delta.
US export sales and shipments were lower Vs the previous sales period at approximately 241K and 343K RBs, respectively. New crop sales were higher at almost 120K RBs.
Internationally, it looks as if Ukraine is holding its own against Putin’s Russia, with the latter making major adjustments to its military strategy. This is positive as it may seriously discourage China with respect to its obvious desire to reabsorb Taiwan into the Central Kingdom. With respect to this matter, timing is a serious matter and a change of majority in both houses of the US Congress in Nov would likely discourage them further. In other news, the world is still expecting large crops to be harvested across the southern hemisphere over the coming months, which could pressure ICE cotton, especially if it begins to rain across West Texas.
For the week ending Mar 27, the trade significantly reduced its futures only net short position against all active contracts to approximately 13.4M bales while large speculators notably increased their aggregate net long position to around 7.8M bales. We believe that the West Texas drought is the main factor in these adjustments, as the US S&D balance sheet disproportionately affects ICE futures.
For this week, the standard weekly technical analysis for and money flow into the May contract remain supportive to bullish, with the market remaining overbought. The weekly release of US export data, weather reports, the April WASDE report, and geopolitical developments will likely be next week’s major influencing factors. Major index fund rolling continues this week, which tends to pressure the front month; but Dec could find support.
At the risk of being a broken record, our advice to producers remains consistent. We recommend pricing 50% of estimated yield at current levels and using options or insurance to put a floor under the remainder of the crop. We will be very closely watching planting progress and drought conditions in TX for adjustments to this strategy in the coming weeks.
Have a great week!
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This post was written by Louis Rose