Rose on Cotton – Cotton Market Losing Streak Ends at Four

March 12, 2022 6:54 pm
Published by

Louis W. Rose IV and Barry B. Bean

ICE May cotton has ended its weekly losing streak at four, gaining 461 points (417 of those points on Friday) on the week to finish at 121.03, with as the May – July inversion strengthened notably to 424.  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.  However, we did not recommend trading any bias due to the mid-week release of the Mar WASDE report.  The Dec contract picked up 359 points on the week, finishing at 104.24.

The cotton market picked up most of its weekly gains on Friday, per the announcement out of China stating that it has issued the equivalent of 1.84M 480lb bales of additional import quota.  The Mar WASDE report and latest US export data did little to inspire our market.  US currency continues to seriously flirt with par, which may have helped cotton futures consolidate for much of the week.

Domestically, the drought across West Texas continues to worsen; the current drought is worse than any, at this point of the year, since 2012, when West Texas produced almost no non-irrigated cotton.  Across the Mid-south we received snowfall and frigid temperatures on Friday evening (6” at our location), we hope winter will give way to spring shortly.  The southeastern states are also expected to see much colder than normal temperatures over the near-term, but most this region is not expected to see appreciable snowfall.  The next major data release (outside of weekly reports) will be the USDA’s annual Planting Intentions Report, slated for release on Mar 31.  At this time, we believe the USDA’s acreage projection will likely be smaller Vs the 12.7M acre figure it put forth last month at the annual Ag Outlook Forum.

The Mar WASDE report was nearly a carbon copy of the Feb report – in fact, the domestic balance sheet was just that, no changes at all. While it is true that backward revisions to USDA’s figures for India resulted in a 1.25M bale reduction in expected world carryout, the market has been expecting such.  Given geopolitical unrest in the world and rampant inflation in staples (food & fuel) it seems to us that the USDA’s world consumption projection of almost 125M bales is too high.  Of course, we have maintained this notion for almost a year now.

For the week ending Mar 3, the USDA classed approximately 65K running bales (RBs), of which approximately 67% of upland bales are deliverable against ICE contracts.  The cumulative total for the season is now almost 17M RBs (99% of expected production), with almost 83% of upland stocks tenderable. 

US Export sales and shipments for the week ending Mar 3 were little changed Vs data put forth the previous week, at approximately 355K and 344K RBs, respectively; next MY sales were lower at around 68K.  China was the largest taker, with Turkey also a major buyer; the latter could, potentially, see some delays in shipments due to the war in Ukraine, but most cotton shipments come through the southern portion of the country via the Mediterranean.  Regardless of the improved pace in recent weeks, shipments remain well off the average weekly pace required to meet the USDA’s 14.75M 480lb bale projection.  USDA was privy to export data ahead of making final WASDE decisions, so we are a bit puzzled as to why they did not trim their export expectation Vs Feb.

Internationally, China has announced the issuance of 1.84M bales more of sliding scale import quota.  This would likely mean more to the market if it was not mostly being moved into the country’s strategic reserve.  In other news, the US and its allies continue to pour sanctions onto the Russian economy as NATO conducts military exercises on its own territory.  Ukrainians continue to fight valiantly, and this conflict looks to be far from over. This presents some potentially bullish potential for ICE cotton and CME grains as planting season nears in Ukraine.

Ukraine is a major producer and exporter of both wheat and corn.  The war seems certain to disrupt planting season (how could it not?) which may add further bullish fuel to CME grains ahead of our own planting season.  In turn, cotton futures seem likely to continue to be supported, with a La Nina weather pattern here at home also adding to supply side concerns.

For the week ending Mar 8, reduced its futures only net short position against all active contracts to approximately 14.3M bales; large speculators reduced their aggregate net long position to around 7.3M bales.

For next week, the standard weekly technical analysis for and money flow into the May contract remain supportive to bullish.  The weekly release of US export data, weather reports, and geopolitical developments will likely be next week’s major influencing factors.

Producers are hearing talk from at least one major merchant that we are potentially looking at another 2010 sized rally.  We can’t quite get that excited about prospects, and question whether that merchant’s incentive may have more to do with making sure cotton stays available later in the season. At any rate, we continue to advise producers to price no more than 50% of estimated production with forward contracts prior to planting.  We expect volatility to remain high for the near- to mid-term and believe that planting flexibility combined with the prospect of new contract highs will prove profitable for producers.    

Have a great weekend!

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    This post was written by Louis Rose