The ICE Mar cotton contract gained 252 points during the first week of 2022, finishing at 115.12, with the Mar – May inversion strengthened slightly at 224. 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 moved higher, despite the raging Omicron COVID-19 variant (coupled with a horrid flu season), weak US export data, and ahead of a Jan WASDE release that has bearish potential. The technical trend and ICE certificated stocks at effectively zero seem to be supporting the market.
It is WASDE week, with the USDA’s Jan report to be released on Wednesday at noon. The monthly Bloomberg survey shows little expected change Vs the Dec report, but we believe USDA will now begin to reduce its export projection, which will likely increase expected carryout. Jan will be the final month in which the production estimate is eligible to amendment ahead of Mar – more likely April.
Domestically, many analysts are expecting at least four interest rate hikes to be handed down from The Fed over the mid-term, in addition to its restrictions on quantitative easing as the central bank attempts to thwart inflation. This is not positive for our market as “more expensive” money will seek less risky investments than futures trading in cotton and other Ags. If these moves occur, equity markets will also likely continue to be hit, which is not encouraging for ICE cotton.
For the week ending Jan 6, the USDA classed approximately 741K running bales (RBs), of which approximately 79% of upland bales are deliverable against ICE contracts. The cumulative total for the season is now almost 13.66M RBs (77% of expected production), with almost 85% of upland stocks tenderable. The existence of so much tenderable cotton is not a bullish factor; neither is it beneficial for merchants, who can (in general) charge less for premium bales.
US export sales and shipments for the week ending Dec 30 were weak at approximately 148K and 112K RBs, respectively. Sales were again mostly to the usual suspects (Vietnam is heavily linked to China via industrial investments and Pakistan via a recent trade deal with China). The data were highly correlated with updated CFTC on-call data. The US will need to ship, on average, nearly 400K RBs per week to realize the USDA’s 15.5M 480lb bale projection. Cancellations were negligible.
Internationally, US foreign relations remain in a quagmire. Russia got away with a cyber attack against the US less than a year ago and they continue to amass troops along its border with Ukraine. China is now rivaling Germany (1936) for the most controversial hosting of Olympic games with its treatment of it Muslim population, takeover of Hong Kong, and overtures toward Taiwan. Additionally, Iran continues to taunt the US (and NATO) with its pursuit of nuclear arms. None of these factors harbors bullish potential. In other news, Conab will provide an update on expected Brazilian production this week, and most cotton market participant are eager to learn what they have to say.
For the week ending Jan 4, the trade increased its futures only net short position against all active contracts to approximately 15.5M bales; large speculators increased their aggregate net long position to around 8.5M bales. Managed money firms continue to keep their outright shorts at an alarmingly low-level and such could lead to (and potentially enhance) market breaks.
For next week, the standard weekly technical analysis for and money flow into the Mar contract remains bullish. Still, we do not recommend trading a long bias ahead of the release of the Jan WASDE release.
Have a great week!
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This post was written by Louis Rose