Rose on Cotton – ICE Cotton Posts Large Weekly and Monthly Gains

May 1, 2022 4:48 pm
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ICE July cotton gained 978 and 1356 points on the week and month, respectively, finishing at 145.63, as the July – Dec inversion ballooned to 2356.  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.  However, we did not recommend trading this bias.  The Dec contract gained 291, finishing at 122.07 – a 1079-point gain for April.

The cotton market moved higher, despite US currency trading at 20-year highs, amid the impending notable rise in US interest rates, and dire domestic and world economic concerns.  The worsening drought across the West Texas region, mill on-call fixations, and strong rumors regarding temporary export ban of raw cotton in India ultimately pushed the market higher.

Domestically, the drought across West Texas, Oklahoma, and Kansas may be slightly mitigated this week, with significant chances of rainfall across the region.  It is seasonally time for rain across this part of the world and Lubbock shows a near 50% chance of rain this week, but predicted amounts are low, and the next 10 days are predicted to be hot and windy.  Planters across the Mid-south and the southeastern states will likely have to dodge showers over the coming week.

Net export sales and shipments were higher Vs the previous assay period at approximately 134K and 390K RBs, respectively.  Sales against 2022/23 were 50K RBs.  The US is 104% committed and 59% shipped Vs the USDA’s export projection.  Shipments again fell short of the pace required to hit the USDA’s official target.  Sales remained ahead the average expected pace for this point of the season while shipments are off pace with the historical expectation.  Cancellations were modest at around 15K RBs.

Slowing US export sales and slow shipments are not currently bearish, given the current potential for low domestic stocks.  If the US supply outlook improves notably in May, merchants and mills could be eager to buy-back commitments, taking profits on long hedges, and immediately selling the re-bought cotton to the board via certificated stocks, all the while likely being able to source new crop stocks at declining prices.

Internationally, rumors of an impending export ban by India continue to pervade (and support) the market.  COVID lockdowns continue to increase across China, which is not good for consumption.  Elsewhere, the war in Ukraine is now in the worst possible spot that it can be, with respect to agricultural production.  Continued strength in other Ags will likely continue to offer support to new crop cotton.

For the week ending April 27, the trade reduced its futures only net short position against all active contracts to approximately 12.85M bales while large speculators reduced their aggregate net long position to around 7.1M bales. 

For this week, the standard weekly technical analysis for and money flow into the July contract remain supportive to bullish, with the market again overbought.  The weekly release of US export data, weather reports, forerunning of the May WASDE report, and geopolitical developments will likely be next week’s major influencing factors.  We continue to believe the supply side of the S&D equation and lopsided mill-producer on-call commitments are the major factors supporting the market.

Producers can afford to spend the next week focusing on planting (if weather permits).  Volatility and weather promise to be the two primary factors in the coming week.  We should continue to see high volatility, with strong support at a profitable level.  It is worth remembering that we’re struggling now to plant the 2022 crop, but we should still expect a season’s worth of storms, floods, and droughts to inspire continued volatility.  There will be time to contract or sell the remainder of estimated production in the coming months.  

Have a great week!

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    This post was written by Louis Rose