Louis W. Rose IV and Barry B. Bean
The ICE Mar cotton contract has a fine holiday season, gaining 348 points on the week (530 over the holidays), finishing at 112.60, with the Mar – May inversion strengthened slightly at 212. Mar gained 619 points for Dec and Mar 22 gained 3448 Vs Mar 21 at the end of last year. 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, on somewhat weaker US currency, the market’s technical “need” to challenge overhead chart gaps and seemingly, the flow of money from fund traders.
Domestically, traders are trying to get a handle on planting projections for the 2022 crop; we are developing our projections now. We hope to publish them shortly. At this time, we are looking for larger cotton area Vs 2021, but droughty conditions across Texas and Oklahoma could temper any bearishness that increased US plantings might inspire. While it is too early to be bullish on weather events, astute traders will keep an eye on winter weather conditions across the aforementioned areas.
For the week ending Dec 30, the USDA classed approximately 619K running bales (RBs), of which approximately 82% of upland bales are deliverable against ICE contracts. Quality continues to hold up very well, even though classing progress remains dramatically behind schedule. The cumulative total for the season is now almost 12.92M RBs (72% of expected production), with almost 85% of upland stocks tenderable.
US export sales and shipments for the week ending Dec 23 were approximately 199K RBs and 169K RBs, respectively. Sales were mostly to the usual suspects, which we do not take as encouraging, while the shipment pace continues to raise concerns. The US will now need to ship nearly 400K RBs per week to realize the USDA’s 15.5M 480lb bale projection, and such is a tall order. Cancellations were negligible.
While there are late season concerns for Brazil’s soybean and early corn crops, we can find little talk about this year’s cotton production. Elsewhere, Russia continues to increase its troop levels along its border with Ukraine while China continues to become more brazen in its actions within Hong Kong and toward Taiwan. None of these factors seem bullish.
For the week ending Dec 21, the trade trimmed its futures only net short position against all active contracts to approximately 14.28M bales; large speculators modestly increased their aggregate net long position to around 7.3M bales. Managed money firms continue to keep their outright shorts at an alarmingly low-level, which is now actually near zero, and such could lead to (and potentially enhance) market breaks. Data for the week ending Dec 28 will not e available until Monday, Jan 3.
For next week, the standard weekly technical analysis for and money flow into the Mar contract is again bullish. Participants will begin the new year with an eye toward 2022 planting intentions and surveys, index fund rebalancing, geopolitical concerns, economic data and what such might infer regarding inflation, and weather across Texas and Oklahoma.
Produces are still seeing a strong spot basis for old crop cotton. The combination of a late crop, unprecedented delays in classing, and continued strong demand has rewarded gamblers, procrastinators, and high yielders with historically high prices. We see no reason for this to change in the short to medium term, with some commentators noting that the 2010/2011 rally peaked in March of 2011. While no sober marketer should expect the same unrestrained rally the market saw in 2010/11, we certainly can’t rule out a continued rally above and beyond what a traditional supply and demand analysis would suggest. We will once again remind producers that cotton has only traded above a dollar four times in the past 200 years, and it is difficult to see any sale over a dollar as less than a win.
New crop pricing offers an enviable choice between good and better. At year’s end, 92.65 on Dec 2022 offers a very comfortable margin of profit even with dramatically high fertilizer and fuel prices making inputs expensive. With that said, however, we are only encouraging producers to price 10-20% of estimated yield at this point. Input costs, competing crop prices, and pending EPA regulation (among other factors) could have a substantial impact on planting intentions, and volatility will be the name of the game going into the spring. Flexibility will be a virtue.
We wish you and yours a Happy, Prosperous, and Safe New Year!
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This post was written by Louis Rose