Louis W. Rose IV and Barry B. Bean
The ICE Dec cotton contract continued to surge last week, gaining 854 points at 104.53, with the Dec – Mar spread inversion ballooning to 309. The cotton market is north of $1 for the first time since 2011; Dec traded to north of $1.07 last week. Dec gained 1200 point in Sept. 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. Dec has commenced the new week near unchanged.
Futures traded on rumors of strong nearby demand, which is supported by gargantuan export sales for the week ending Sept 23 (even if the vast majority of sales were again into China), smaller expected crops in India and China and rains across the US Cotton Belt.
For the week ending Sept 26, the US crop was rated in 65% good or better condition, which is up 1 percentage point Vs the previous assay period. The US harvest was estimated at 11% complete Vs the rolling 5-year average of 14%.
For the week ending Sept 30, the USDA classed approximately 149K running bales (RBs), of which 89% are deliverable against ICE contracts. The cumulative total for the season is now almost 682K RBs, with more than 88% tenderable. These data show just how late this season’s crop is.
With respect to production, rains across much of The Belt have been light to moderate even as forecasts have oscillated wildly. As far as we can tell, most areas had received insufficient rainfall prior to the weekend to significantly damage yield and quality damage of the crop. Still, the Mid-south will likely realize some deterioration of color grades as showers continue, and, once 11s and 21s are stained, such grades are not likely to return in a major way, even if fair weather prevails. Similar weather is expected for easter The Belt over the near- to medium-term while West Texas, Oklahoma, and Kansas are expected to see mostly favorable conditions.
Here in the Mid-south, we saw some cotton harvested last week south of Memphis, but we are yet to glean any yield information.
Net export sales were notably higher Vs the previous assay period while shipments were lower at approximately 588K and 176K RBs, respectively. Sales were well ahead of the weekly pace required to meet the USDA’s export target while shipments again fell short of the pace requirement. Sales are well ahead of the average expected pace for this point of the season while shipments are on par with historical expectations. There is still no sign that 2020/21 total exports were significantly above 16M 480lb bales Vs the USDA’s official estimate of 16.35M. China was again the major taker of US cotton, with sales cancellations negligible.
Internationally, concerns remain regarding flooding across portions of India and eastern China. While China is concerned about its own crop and India’s, too (and refuses to buy from Australia), it is forced to buy from the US due to world boycotts of Xinjiang cotton produced with forced labor. However, we believe that China will primarily be concerned with the cost of moving Xinjiang cotton across its country to mills in the east versus the cost of sourcing raw cotton elsewhere. With China being able to move cotton across nearby borders for processing and no real way to track and identify bales from Xinjiang, people who do not want to handle, sell, or wear cotton from Xinjiang will still be doing so, at least to some extent. China’s actions are likely not contingent on much beyond their own fiscal security and interests.
For the week ending Sept 28, the trade notably increased its futures only net short position against all active contracts to just north of 18.25M bales as the trade picks up cotton from producers; large speculators also increased their aggregate net long position to around 9.6M bales. The spec position is now stacked in a wildly bullish manner, which could lead to further market breaks as was seen on Friday when the market retreated from its intraday high, north of $1.07.
For next week, the standard weekly technical analysis for and money flow into the Dec contract remain bullish, with the market now extremely overbought. Impending harvest pressure and economic concerns could cause problems for the Dec contract over the near- to medium-term, as could liquidation ahead of the Oct WASDE report, which will be published on schedule (Oct 12) due to the 11th hour negotiations to postpone a government shutdown.
Producers had an historic opportunity to price cotton over $1.00 this past week, and our friends in the country tell us many of them did just that. We expect volatility to remain high, and while a top at $1.07 can’t be ruled out, with short runs to $1.10 a possibility, as is a profit taking correction back down to the mid-90s.
Of some concern are stories we are hearing of producers who have now priced 80-90% of estimated yield. We will encourage caution in overextending fixations and remind producers that their average net price should be well above the cost of production at present, and that demand continues to look strong in the short term. We will also remind producers that rolling excess fixations to 2022 could be costly with a nearly 20 cent ($100/bale) spread between Dec 21 and Dec 22.
Have a great week!
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This post was written by Louis Rose