Louis W. Rose IV and Barry B. Bean
The ICE Dec contract picked up 38 points last week to settle at 60.90. Dec did trade south of the 60.00 level 4 out of the last 5 trading days but did not settle below that psychologically significant level on any of those days. The Dec – Mar spread remains at less than full carry but weakened to (73) 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 correct.
ICE cotton found support on the week on improving export sales data, recent untimely rains across West Texas and the slow arrival of Indian cotton. Preliminary yield reports, especially from the northern half of the Delta, along with unwanted rains, also offered some support to the market. On the other hand, strengthening US currency and impeachment talk in Washington may have applied some drag to ICE futures.
The US crop continues to mature rapidly, as harvest operations speed up across The Belt. The Mid-south and Southeast continue to bake amid record heat and mostly dry conditions, although the northern Delta received unwanted precipitation last week. Damage to the crop was likely minimal. A drive through the Mississippi Delta on Thursday revealed rapid harvest progress, full gin yards and cotton that mostly looked likely to produce strong yields. Still, we are in the early stages of harvest, there are many late sown fields that may not produce expected yields.
US export data improved last week but remained lackluster. Sales and shipments against 2019/20 for the week ending Sept 19 were around 170K and 183K running bales (RBs), respectively. Sales were just ahead of the average weekly pace required to meet the USDA’s 16.5M bale export projection while shipments were 56% of the pace requirement. Sales against 2020/21 were nearly 13K RBs. The US is 54% committed and 10% shipped Vs the USDA target. Sales cancellations were near non-existent.
On the international front, dry conditions persist across Australia and South America, although the latter – especially Brazil – could see some relief from drought over the near- to medium-term. Continued rains across India have slowed new crop arrivals, which has caused prices to rise. Cotton imports into China were off approximately 45% Vs July at the equivalent of around 413K 480lb bales. We are also hearing news of slow yarn sales in Bangladesh and Vietnam, indicating a continuing slowdown in textile demand.
For the week ending Sept 24 the trade reduced its aggregate futures only net short position to approximately 683K bales while large speculators slightly increased their aggregate net short position to around 3.1M 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.
We continue to see limited strategies for producer sales. The past two weeks have made a convincing argument that the range for the Dec contract extends into the low 60s, but efforts to move to the top of that range have proven short lived. Many producers are telling us that they plan to put cotton into the loan and wait for better conditions in the spring, but it is hard to endorse that strategy from our perspective. As much as we understand cotton is too cheap, we believe market moves towards the mid-60s are scale up selling opportunities, and good places to buy puts if cotton is still in the field of gin yard.
Between impeachment talk and on again / off again trade talks, there is a lot of opportunity for short market spikes and selloff in the coming months. A good option hedge and a good spot broker will be a producer’s best friends between now and January.
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 and whether impeachment investigations have any effect on negotiations.
Have a great week!
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This post was written by Louis Rose