Rose on Cotton – Cotton Market Finishes Week Above 90 Cents

July 25, 2022 2:54 pm
Published by

Louis W. Rose IV and Barry B. Bean

Dec cotton had something of a turnaround on the week, picking up 218 points, finishing at 90.89, with the Dec – Mar inversion contracting to 359.  Last weekend, our proprietary models predicted a finish on the week that was to be near unchanged to lower Vs the previous week’s settlement, which proved to be incorrect.  However, we overrode that prediction and recommended trading on the long side. 

The cotton market moved higher on slowing of long spec liquidation and continued short covering by the trade as US supply side concerns have now become the focal point of the market.  Another round of weak US export data applied drag to the market on Thursday and Friday.

Domestically, it is the same old story – mostly sunny, extremely hot, and dry across most of The Belt, outside of most of the southeastern US region.  Still, there is a break from the heat on the horizon for the Mid-south.  Last weekend’s general rains across the Mid-south did help the production potential of this season’s crop while much of the non-irrigated West Texas crop is likely written off by most analysts, and we concur. Regardless of weather, for the remainder of the season, this early stress will raise quality concerns.

For the week ending July 17, the US crop was rated at 38% in good or better condition, off 1 percentage point Vs the previous week and 22 percentage points off this time last season.  The condition of the Texas crop is rated in 79% fair or worse condition, with only 1% earning a rating of “excellent”.  Both Missouri and Oklahoma have 0% in the “excellent” category, although our local sources in Missouri would take issue with that.  A quick glance at the data clearly shows that the Mid-south crop is hurting while the Texas crop continues to suffer.  Next week’s report will probably show some improvement in the Mid-southern crop, but do not expect a dramatic improvement.  The USDA estimates the pace of fruit setting significantly higher Vs last season, which is not encouraging.

Last week we outlined the caveats of relying too heavily on S&D projections and estimates from China’s central government, which are basically that the publisher has a vested interest in the ICE and Chinese cotton futures and options markets.  This week, two state-owned market participants – Chinatex and COFCO – have agreed to pay fines exceeding $3m for violating trading rules. 

For the week ending July 19, the trade significantly reduced its futures only net short position against all active contracts to less than 6M bales while large speculators reduced their aggregate net long position to around 3.32M bales.  

For this week, the standard weekly technical analysis for and money flow into the Dec contract remains out-and-out bearish with the market remaining notably oversold.  We continue to believe the market may have recently reached levels at which mills will fix on-call commitments and at which US supply potentially will offer support.

Producers are facing a market that, like the weather, seems solidly in the summer doldrums, albeit with considerably higher volatility than we are used to seeing in July and August.  Many of our producer customers are debating whether to accept current levels or hold out for a return to dollar plus cotton.  Our own crystal ball isn’t as clear as it was a few weeks ago, but we continue to think that current fundamentals and volatility, combined with mills in need of fixations will spur the market over a dollar again before harvest, with the primary question being “how far”? We all know how Bernard Baruch answered that question, and we think he earned his reputation by being right more often than wrong.  We have GTC orders on our own personal cotton at the $1.05 and $1.10 levels, and plan to review on a weekly basis through mid-late August.  These orders are tempered by production concerns, and the possibility of harvest rallies in either the market or the basis. We do not plan to be more than 65% fixed prior to September. 

Have a great week!

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    This post was written by Louis Rose