Rose on Cotton – Cotton Market Finishes WASDE Week Lower

April 11, 2022 3:37 pm
Published by

Louis W. Rose IV and Barry B. Bean

ICE May cotton gave up 213 points on the week to finish at 132.41, as the May – July inversion contracted to 135.  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 correct.  The Dec contract gained 480 at 115.48.  The cotton market has commenced the abbreviated trading week higher.

The cotton market (old crop) moved lower on further weakening US export data, index fund rolling, and a relatively bearish April WASDE report.  The worsening drought across the West Texas region helped new crop futures to finish significantly higher.

In its April WASDE report, the USDA held its 2021/22 numbers unchanged Vs Mar, with domestic carryout projected at 3.5M bales.  Aggregate world carryout for 2021/22 was projected 810K bales higher Vs Mar at 83.38M bales.  Production was estimated 350K bales higher Vs Mar; consumption was estimated 470K bales lower at 124.07M bales.  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.

Domestically, the drought across West Texas, Oklahoma, and Kansas continues to worsen, and it is now truly time to be concerned.  While we should still see some rains across the region, regular rainfall will be required to produce decent yields.  The Mid-south and the southeastern states will see significant to heavy rainfall this week, and drier conditions will be required before planting can get underway across these regions.

US export sales for the week ending Mar 31 were notably lower while shipments were significantly higher Vs the previous sales period at round 71K (MY low) and 478K (MY high) RBs, respectively.  Sales were ahead of the weekly pace required to meet the USDA’s export target for only the second time in 2021/22.  Cancellations were significant at almost 64K RBs.

Internationally, Ukraine is now facing a fresh onslaught across its eastern territory, which will keep risk premium in many markets.  This should be supportive for ICE cotton, with the caveat that as evidence of Russian war crimes becomes increasingly prominent, so do concerns of hostilities expanding outside the immediate region.

For the week ending Mar 27, the trade trimmed its futures only net short position against all active contracts to approximately 13.2M bales while large speculators notably increased their aggregate net long position to around 8.1M 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 no longer overbought.  The weekly release of US export data, weather reports, and geopolitical developments will likely be next week’s major influencing factors.  Major index fund rolling continues this week.

We’re no longer worried about sounding like a broken record on our advice to producers. Producers should be 50% fixed at current prices, but should either retain control of the remaining 50%, or consider the use of a call strategy to take advantage of weather and supply side rallies through the remainder of the season.  Bernard Baruch famously explained that speculators would always trade a rally “too high” stands today, and we agree with him.  It’s anyone’s guess whether Dec will top out at 120, 150, or 200, but it certainly seems certain that we haven’t yet seen the Dec contract high.  At the very least, producers should keep half their powder dry until they have a stand in the field.    

Have a great week!

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    This post was written by Louis Rose