Rose on Cotton – ICE Cotton Gives Up Nearly Half of Previous Week’s Gains, Manages to Stay Above 60.00

September 22, 2019 9:46 pm
Published by

Louis W. Rose IV and Barry B. Bean

The ICE Dec contract gave back nearly half of last week’s impressive gains, losing 176 points to settle at 60.52.  Dec did not, however, trade below the psychologically important 60.00 level.  The Dec – Mar spread remains at less than full carry but weakened to (65) on Friday.

Last weekend, our proprietary model (timely prediction available in our complete weekly report) predicted a settlement that was to be near unchanged to higher Vs the previous Friday’s finish, which proved to be incorrect.  However, we recommended disregarding the model results and opted for a short position on the week.

ICE cotton could not push higher on the week amid a lack of bullish news, impending harvest pressure and continued rumors of weak business, which was confirmed by another round of weak export data.  The Fed trimmed interest rates 25 basis points, which was expected and resulted in only modest reactions in both the currency and commodity markets.

The US crop continues to mature rapidly, with harvesting operations speeding up across The Belt.  The Mid-south and Southeast continue to bake amid record heat and arid conditions, which are assisting defoliants and boll openers.  However, there is some potential relief from drought on Monday.  Showers would not be terribly costly for producers and would likely increase the efficacy of defoliants.

Another round of weak US export data was released last week.  The US only sold around 100K RBs (none for 2020/21) net for the week ending Sept 12 and shipped far less than required to hit the USDA’s latest export target.  Sales cancellations ballooned to almost 60K bales, which is understandable given where many sales currently on the books were conducted. We expect to see more cancellations going forward.

On the international front, trade negotiators were in Washington last week to plan next month’s official talks, but they left the US earlier than planned and cancelled scheduled goodwill visits to the Midwest and Montana.  The implication is, of course, that next month’s talks are standing on shaky ground.  Across the southern hemisphere, both Australia and the Mato Grosso region in Brazil continue to experience hot and dry conditions, which is extremely troubling for producers Down Under.

For the week ending Sept 17 the trade noticeably increased its aggregate futures only net short position to approximately 3M bales while large speculators reduced their aggregate net short position to around 3M bales.  The spec short position, while heavy, is beginning to appear more manageable.

For a complete analysis of COT data see our weekly commitments of trader’s analysis and commentary.

Producers got mixed messages this week. While the Dec rally to 6300 was encouraging, the inability to move closer to 6500 leaves prices in the so-called “donut hole”, with neither the market nor the LDP/MLG offering opportunities to trade cotton at a profitable price.  We took advantage of the move to buy March and May puts, moving our hedge closer to the 50% range. Given a lukewarm forward contracting basis, we continue to see the option pit and recap sales as the most attractive pricing tools available to producers, and see any move back to or through the 6300 level as an opportunity to buy puts.

For this week, the standard weekly technical analysis for and money flow into the Dec contract remain bearish.  The market will continue to closely monitor US and international weather conditions, US harvest progress and yield reports and US export data.  Market participants will be on the lookout for rumors and news regarding next month’s trade talks.

Have a great week!

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This post was written by Louis Rose