Louis W. Rose IV and Barry B. Bean
ICE July cotton gained 965 points on the abbreviated week to finish at 141.98 as the July – Dec inversion expanded notably to 1823. 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 Dec contract gained 700 at 122.48.
The cotton market moved higher despite weakening US export data and US currency trading above par on the worsening drought across the West Texas region, mill on-call fixations, an abandonment of peace talks concerning the war in Ukraine, and on an intensification of fighting in eastern Ukraine.
Droughty conditions across West Texas, Oklahoma, and Kansas continue to worsen, but there is a 45% chance of showers/rain near Lubbock, Texas on Wednesday of next week. Planting has commenced across the lower- and mid-Mississippi River Delta, but continued rains and cool temperatures will likely halt most sowing until later next week. Sowing across the southeastern states should increase notably toward the end of the month. In other news, the Biden administration has reversed itself and agreed to modestly increase its allowance of oil drilling on federal lands (albeit at a higher cost to oil prospectors). This could apply some pressure to crude and cotton prices over the near- to medium-term.
US export sales for the week ending April were a marketing year low while shipments were noticeably lower Vs the previous sales period at round 60K and 352 RBs, respectively. New crop sales were higher at more than 136K RBs. Shipments were well off the weekly pace required to meet the USDA’s export target. Cancellations were significant at 44K RBs and were mostly attributable to China and India.
Weakening sales are to be expected given the level of current spot prices, strengthening US currency, and a lack of stocks available for sale. We continue to hear that some mills are reselling cotton to merchants, which works for the latter due to positive margins on long hedges.
Internationally, we continue to hear of waning demand for and building inventories of yarn, which indicates slowing downstream demand. China has locked down Shanghai (25M+ people) due to increasing COVID infections, further slowing use-based demand and exacerbating logistical and supply chain issues for the US. We are now hearing reports of Russia employing chemical weapons in its attacks against eastern Ukraine. While such use is not new for Russia, one wonders if Russia will eventually use tactical nuclear weapons should the war not turn in their favor over the near- to medium-term. While the latter still seems unlikely, such action in eastern Ukraine could have a long-term bullish effect for agricultural markets.
For the week ending April 12, the trade increased its futures only net short position against all active contracts to approximately 13.5M bales while large speculators held their aggregate net long position near unchanged at around 8.1M bales.
For this week, the standard weekly technical analysis for and money flow into the May contract remain supportive to bullish, with the market again overbought. The weekly release of US export data, weather reports, and geopolitical developments will likely be next week’s major influencing factors.
Producers will find much to test their mettle in the next few weeks. If there was ever a situation that supports 50% forward contracting and a 50% put hedge, we’re in it. While prices over $1.20 will tempt growers to fix increasing portions of their estimated yield, we believe the calendar, poor planting conditions, and continued uncertainty in Ukraine make a better argument for keeping one’s powder dry for a few more weeks.
Have a great holiday weekend!
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This post was written by Louis Rose