Bears were winners on the week with the ICE Mar contract giving up 109 points, settling at 72.55. However, the Mar – May spread strengthened to (114) as index funds sold Mar and bought May and other deferred contracts. By Monday, May will be the de facto lead month by virtue of having the greatest open interest (OI). The Dec contract only gave up 19 points at 73.93.
Last weekend, our proprietary model (timely prediction available in our complete weekly report) called for a settlement that was to be near unchanged to lower Vs the previous Friday’s finish, and we had a chance to trade this bias briefly, post the WASDE report’s release.
ICE cotton trading was influenced last week by a WASDE report that, in our opinion, was bearish at the world aggregate level and neutral to somewhat supportive with respect to domestic estimates and projections, decent but weakening US export data and news that cast doubts on the US and China being able to reach a trade accord over the near-term. The general expectation for bearish planting intention data to be produced by the National Cotton Council and a 1.1% increase in US currency value also likely applied drag to cotton futures over the course of the week.
In its Feb WASDE report, the USDA increased its projection of world aggregate ending stocks 2.2M bales Vs figures put forth in the Dec report at 75.5M bales; debits to expected world consumption far outpaced reductions in expected production. The beginning stocks estimate for the current marketing was enhanced 1.5M bales Vs Dec. Approximately 1.5M bales of the reduction in the projection of consumption is attributable to China. Domestically, US ending stocks were projected 100K bales lower Vs Dec at 4.3M on a 200K bale reduction to US production and a 100K bale debit to expected domestic consumption.
Now, the USDA’s domestic production estimate was based on final field and telephone surveys for the 2018 crop and were conducted in late Dec. Hence, the Feb WASDE estimate is effectively what we would have seen in Jan as the USDA does not make production estimate adjustments (past Jan) ahead of the release of the final USDA-NASS ginning report – and only then if the figure in the latter report differs significantly Vs the Jan estimate. Else, they wait until NASS produces a final figure in June before finalizing their balance sheet.
We said all of that to say this – USDA-RMA insurance data suggests that further significant loss has been incurred for the 2018 crop during Jan, so a crop much nearer to 18M bales seems plausible if not likely.
The National Cotton Council (NCC) released the results of their 2019 planting intentions survey of cotton producers on Saturday morning at its annual meeting. The survey showed that (in Dec and early Jan) US producers intended to sow 14.5M acres to cotton in 2019, up 2.9% Vs 2018. All regions in the US, except the southeastern states, are expected to increase acreage Vs last season. Given the favorable soil moisture profile across most of The Belt, 14.5M acres is a bearish figure.
US export sales were off significantly for the week ending Dec 27 Vs the previous sales period while shipments were near unchanged at approximately 242K and 207K running bales (RBs) respectively. Given that the sales period encompassed the Christmas holiday, we are not too disappointed in these figures. And, with the sales period to be reported upon next week containing the New Years holiday, we expect a similar release on Thursday. Still, we think that sales over the entirety of the 5-week hiatus will prove to be friendly.
CFTC Commitments of Trader’s data (futures) for the week ending Jan 8 showed that managed money firms liquidated longs and sold the market outright at a significant level while the trade bought modestly and covered shorts. The trade was net short approximately 6.5M bales while managed money firms were net short around 500K bales.
For the week ending Dec 28, mill commitments against the 2018/19 MY were significantly lower at approximately 7.9M bales Vs approximately 2M bales of producer commitments. It certainly looks as if the unfixed position of mills will be less burdensome as July approaches Vs what we have seen in recent years.
Internationally, other than unencouraging news regarding a US-China trade agreement and estimates and projections put forth in the WASDE report, it was a rather quite week. Such is often the case when China celebrates its week-long Spring Festival/Lunar New Year holiday.
For next week, the standard weekly technical analysis for and money flow into the Mar contract remain bearish, with the market again approaching an oversold condition. Index fund rolling from the Mar contract to deferred months will culminate week. The market is now entering a medium- to long-term consolidation phase, which often foretells a steep and significant move looms on the horizon or just beyond. Headlines alluding to US-China trade talks will, no doubt, continue to be closely monitored. Further, the NCC planting intentions survey may provide pressure to both old and new crop futures over the near-term.
Have a great weekend!
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This post was written by Louis Rose