Rose on Cotton
Posted : August 07, 2020

ROSE ON COTTON – ICE COTTON GIVES UP SIGNIFICANT GROUND FOR WEEK, DEMAND LARGEST CULPRIL

19-July-2020

LOUIS W. ROSE IV AND BARRY B. BEAN

The ICE Dec cotton contract gave up 237 points for the week ending July 17 to finish at 61.94 as the Dec – Mar switch weakened to (69), still far less than full carry.  Last weekend, our proprietary model (timely results provided in our complete weekly report) predicted a finish that would be near unchanged to higher Vs the previous Friday’s settlement, which proved to be incorrect.  Still, we recommended our clients hold fast to their short futures positions.

ICE cotton moved lower on the week on extremely weak demand for US cotton, as well as other growths, despite a worsening drought and soaring temperatures across West Texas. Weak US demand was quite evident in the latest round of USDA weekly export data.

Domestically, some showers occurred across the Mid-south and the southeastern states over the past week, with thundershowers occurring across some of the northern Delta at the time of this writing.  However, little precipitation was recorded across West Texas as temperatures across the region soared to around 110°F.  Only portions of the Atlantic Coast growing regions are currently expected to see any significant rainfall over the coming week.  Last week’s crop progress report suggested slightly worsening conditions of this season’s crop; the upcoming report seems likely to show more declines.

However, not all areas are suffering.  Our partner Scott Sivils reported the following from his recent travels across the central Delta and the southeastern US:

“I saw a good bit of cotton acreage yesterday from Memphis south to Clarksdale and across the Mississippi river into the Marianna/Helena/Marvell (AR) area.  I thought it looked great.  A little late as there were still a few fields not quite lapping in the middle (I would estimate 2 weeks late on average).  Estimated 80% of the cotton was in bloom.  Saw very few irrigation rigs running.  Phytogen 400 really stood out.  This variety was much more green/lush/ and healthy looking.  So green it had that purple tint to it.  Phytogen marketing team is not shy about putting out field signs. They must really be trying to make a statement this year.

Soybeans, rice, and corn looked good, too.  Area has caught nice rains the first two weeks of July. Although I have not been down there, I hear the south Delta crop looks very promising also.

Also saw a good bit of SW Georgia/ SE Alabama cotton on my way back from FL on the 11th.  I thought it looked as good as I have ever seen it.  Even my wife commented on how pretty the cotton and peanuts looked, which she has never done.   The area appears to have had ample rain, to date.”

Net export sales and shipments against 2019/20 were off significantly Vs the previous sales period (and quite disappointing with sales being net negative) at approximately (12K) RBs and 313K RBs, respectively.  The US is 120% committed and 93% shipped Vs the USDA’s projection.  Shipments were just off the pace required to realize the USDA’s target.  Nearly all sales were (again) accounted for by China (and Vietnam), which continues to suggest no significant nearby demand for textiles.  Sales against 2020/21 were also disappointing at less than 30K RBs.  Sales cancellations were significant at approximately 56K RBs and were mostly attributable to China.

It was another slow week in international news, but the Indian monsoon continues to progress and harvest progress across Brazil has been noted.  Elsewhere, the US and China continue to trade barbs.  Phase Two trade negotiations with China have been set aside for the time being.

For the week ending July 14, the trade increased its aggregate futures only net short position against all active contracts to approximately 8.6M bales while large speculators increased their net long to more than 2.8M bales. These data are also not suggestive of nearby demand for cotton.

For this week, the standard weekly technical analysis for the Dec contract remains supportive to bullish, with money flow now turning bearish.  Weather reports, US export data, pandemic news and forecasts seem to hold the greatest potential for moving prices next week.

There was a modest amount of business this week with one of the major merchants purchasing large lots of equities stored in their own warehouses.  Given the absence of competitive bids from other buyers and lack of inquiries, this business can be assumed to have more to do with one merchant’s desire to control the cotton in their warehouse than any fresh demand.

Producers still holding old crop equities are rolling the dice on a late summer recovery, but those odds look increasingly long with each passing day. In addition to a lack of demand and the likelihood that the pandemic will continue to stifle said demand at least into 2021, these producers should consider the fact that a rally strong enough to move equity prices into a desirable range would also likely move the AWP high enough to generate substantial storage charges that could more than offset any gain in futures. We cannot strongly enough recommend producers sell remaining old crop and move bullish strategies into the May 21 call options.

New crop forward contracting is deep into the summer doldrums.  Current prices offer no premium over likely prices at harvest, effectively eliminating any incentive to commit.  We see extremely limited downside, but considerable upside potential to selling recaps after harvest.  Aggressive bears may consider laying in a put option hedge now and use the CCC loan to market equities in the winter or spring.

Have a great week!

Report Courtesy: Rose Commodity Group

With well over 60 years combined experience in the commodity trade, the partners of the Rose Commodity Group offer a wealth of knowledge and perspective to their clients. With expertise and direct experience in agronomy, crop production, futures and options, spot trading, hedging, shipping, and insurance, the Rose Commodity Group approaches marketing and risk management from a comprehensive perspective. Rose Commodity Group is not directly affiliated with any other commodity firm; we are not commission futures brokers. Our strategies and advice are based entirely on our client’s specific needs and goals.

To learn more about Rose Commodity Group please

visit: https://www.rosecommoditygroup.com/about/

Disclaimer: This publication is presented for informational purposes only.  While the information contained herein is believed to be accurate and factual, the possibility of error exists. Commodity trading is an inherently risky proposition and there is no guarantee that trades based on the information herein will result in profitable outcomes.

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