Rose on Cotton – ICE Cotton Bucks Seasonal Trend, Finishes July with Significant Gain

August 4, 2020 1:45 pm
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Louis W. Rose IV and Barry B. Bean

The ICE Dec cotton contract gained 256 points for the week ending July 31, picking up178 for the month to finish at 62.66.  The Dec – Mar switch strengthened to (59).  Last weekend, our proprietary model (timely results provided in our complete weekly report) predicted a finish that would be near unchanged to higher Vs the previous Friday’s settlement, which proved to be correct.  The Dec contract began the week (and month) with a 121-point move to the upside.

ICE cotton moved higher on the week, despite the release of poor domestic and international economic data, continued showers across West Texas, another improvement in the condition rating of the US crop and the release of tepid export sales data.  Weakening US currency, along with position evening ahead of month’s end seem likely to be responsible for the week’s gains.

For the week ending Aug 2, the US crop was rated in 45% good or better condition, 4 percentage points off the previous week’s report.  The percent of the crop rated in poor to very poor condition was unchanged at 16%.

I took an extended drive though the northern half of the Delta on Wednesday and I did not like what I saw.  This year’s crop looks stunted, with at least 50% of fields having yet to close canopy.  However, fruit retention is excellent for the late crop.  Overall, I fear this region (with respect to yield and production) is in trouble.  Producers are concerned as well. The area is expected to see significant rainfall over the next few days.

Rain and showers continued to occur across West Texas last week, but significant accumulation of rainfall has continued to be spotty even as southwestern Oklahoma received some substantial precipitation.  The Mid-south has received some strong rains last week.  Cotton producing areas near the Atlantic coast saw mostly beneficial rainfall from hurricane/tropical storm Isias.

Net export sales were higher (but still disappointing) while shipments were lower for 2019/20 at approximately 119K and 329K RBs, respectively.  The US is 119% committed and 94% shipped Vs the USDA’s 15.2M bale projection.  Shipments were well off the pace required to realize the USDA’s target.  Sales against 2020/21 were also disappointing at less than 10K RBs.  New sales were mostly to Vietnam and China, but India and Bangladesh were also buyers.  Sales cancellations were approximately 23K RBs.

US exports will likely fall significantly short of the USDA’s 15.2M bale projection.

Internationally, the collapse of a major Chinese cotton buyer has left many of our Aussie friends in the lurch as the firm has failed to make good on its purchase commitments.  Some of the source of this issue is, reportedly, Australia’s vocal disenchantment with China over the pandemic (which is warranted, in our opinion).  Elsewhere, the Cotton Corporation of India has projected Indian production at the equivalent of 26.16M 480lb bales, well below the USDA’s latest forecast of 28.5M bales.  The Cotton Corporation of India (CCI) is also attempting to ramp up sales into Bangladesh and Vietnam, with a CCI-owned warehouse being built within the latter.

In other news, the EU is now officially in a recession – a rather steep one.

For the week ending July 28, the trade increased its aggregate futures only net short position against all active contracts to approximately 8.1M bales while large speculators increased their net long to almost 2.47M bales. These data are not suggestive of strong nearby demand for cotton.

For an in-depth analysis of CFCT data see our weekly CFTC analysis and commentary.

For this week, the standard weekly technical analysis for the Dec contract remains supportive to bullish, with money flow remaining bearish.  Weather reports, US export data and potential position adjustments ahead of the Aug WASDE report’s release seem likely to frame price action over the coming week.

We are seeing some spot bids for remaining producer cotton, but we can’t come up with a good argument to hold cotton and are advising our producer customers to cut loose and bid farewell to 2019 marketing.

Forward contracting options for producers continue to be lukewarm at best, and look to be primarily focused on filling merchant warehouses. With forward contracting near normal harvest levels, there appears to be little incentive for producers to commit to one particular contract or merchant, effectively eliminating the potential to participate in rallies or basis plays. Should the Dec move through the 6500 level, we will re-evaluate.

Have a great week!

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This post was written by Louis Rose