Rose on Cotton – USDA Goes Bullish Early in New Crop S&D Balance Sheet

May 14, 2022 7:49 pm
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Louis W. Rose IV and Barry B. Bean

ICE July cotton picked up 159 points on the week, finishing at 145.20, as the July – Dec inversion contracted to 1721.  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 due to the WASDE release on Thursday.  The Dec contract gained 425, finishing at 127.99.  If it has not already done so, Dec is about to take over as the lead month earlier than we have ever seen.  Data suggest there may be some index traders/funds that have decided to roll long positions early.

The cotton market moved higher on a bullish May WASDE Report, continued drought across the West Texas region, mill on-call fixations, and some recovery in the oil and industrial equities markets.

USDA decided to go bullish early for the 2022/23 MY.  In its May WASDE report, the USDA projected US carryout for the new crop at 2.9M 480lb bales, which is a very bullish figure.  US production was projected at 16.5M bales, with exports at 14.5M bales.  USDA is obviously hesitant to lower its 2021/22 US export estimate, but it did reduce its domestic production estimate 100K bales to 17.52M bales, based on the USDA-NASS final ginning report for the 2021 crop.  At the world aggregate level, 2022/23 production, consumption and carryout were projected at around 121M, 122M, and 82.8M bales, respectively.  We have projected these figures at 120M, 115M, and 90M bales.

Domestically, the drought across West Texas continues as rains have largely failed to materialize to the south and west of Lubbock over the course of the week.  West Texas is currently expected to see hot, dry, and windy conditions over the near-term.  The Mid-south and the Southeast will have to deal with some showers and storms over the near-term, but with most of the area having made substantial planting progress in the past week, these rains will be largely beneficial.  The USDA is estimating planting progress well below what we believe has actually occurred.  

Net export sales and shipments were lower Vs the previous assay period at approximately 30K and 94K RBs for 2021/22 and 2022/23, respectively. Shipments were notably lower at almost 372K – well off the average weekly pace required to meet the USDA’s export projection.  The US is 106% committed and 65% shipped Vs the USDA’s projection.  Sales remained ahead the average expected pace for this point of the season while shipments are off pace with the historical expectation.  Cancellations were negligible.

Internationally, COVID lockdowns have again intensified across China, and this is not positive for demand.  Conab has estimated this season’s Brazilian production at the equivalent of almost 13M bales (effectively unchanged Vs April) Vs USDA’s estimate of 13.2M bales.

For the week ending May 10, the trade significantly reduced its futures only net short position against all active contracts to approximately 12.2M bales while large speculators trimmed their aggregate net long position to around 7.2M bales.  The trade’s adjustments seem warranted and were likely the result of their close and generally superior S&D knowledge.

For this week, the standard weekly technical analysis for and money flow into the July and Dec contracts remains supportive to bullish.  If it does not begin to rain significantly across West Texas, the market will likely move higher.

Producers should breathe easier following WASDE and can afford to focus both efforts and anxiety on planting and production for the next week.  WASDE effectively raised both the floor and the upside potential of the DEC contract for the next few weeks, and ordinary volatility could easily move Dec into the 130s.

Have a great weekend!

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    This post was written by Louis Rose