ROSE ON COTTON – COTTON MARKET SURGES ON CHINESE PURCHASES, RETRACES ON CONCERNS REGARDING FUTURES US – CHINA TRADE RELATIONS
LOUIS W. ROSE IV AND BARRY B. BEAN
ICE July cotton picked up 21 points for the week ending May 1 to finish at 55.84 while Dec gave up 15 at 57.52. Both contracts posted large gains for the month of April. The July – Dec switch strengthened to (168), significantly short 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 correct.
ICE cotton futures moved notably higher last week on confirmation of large export sales to China and then gave back most of those gains on Friday as President Trump expressed confidence that the responsibility for the Wuhan pandemic should be laid squarely upon China, which incited speculation that worsening US – China trade relations are at hand. This is something that we have considered likely for quite some time.
Domestically, the USDA’s crop progress report for the week ending May 3, (scheduled for release Monday afternoon) should show that significant planting progress has been accomplished. Planting is underway across much of the Mid-south, although it is raining at the time of this writing. Planting across the southeastern states is also likely to show significant progress. Producers across much of West Texas and Oklahoma continue to hope for increased moisture.
Rumors and reports of business from China proved to be at least partially true - and not just for cotton. The latest US export sales data against 2019/20 were robust at 435K running bales (RBs) while shipments were off modestly at around 254K RBs. The US is 110% committed and 71% shipped Vs the USDA’s export projection. Sales were well ahead of the average weekly pace required to meet the USDA’s export target while shipments were approximately 85% of the pace requirement. Sales against 2020/21 were higher at nearly 149K RBs. Sales cancellations were modest at around 35K.
We continue to project US exports for 2019/20 at 16M bales, for now, but believe this number could potentially move higher. We are hearing whispers regarding another strong export report in the offing for next week.
Outside of China’s large purchases of US cotton and President Trump’s confident statements that the pandemic is China’s fault, little international cotton news came across our wires. Mills and textile factories across much of Asia remain shuttered even as Chinese mills resume operations.
For the week ending April 28, the trade increased its aggregate futures only net short position against all active contracts to approximately 4.5M bales while large speculators reduced their aggregate net short position to less than 2.1M bales. Hence, significant potential for upside movement at the hands of spec short covering remains in the market.
For an in-depth analysis of CFCT data see our weekly CFTC analysis and commentary.
For this week, the standard weekly technical analysis for and money flow into the July contract remain bearish. For the coming week, trade participants will likely listen (and watch) closely for any confirmation of further business from China and, conversely, signs of worsening trade relations between the US and China. Bearish fundamentals keep the gap below the market just north of 48.00 in play as a downside target.
Producers holding old crop cotton should take note that spring markets are volatile by nature, and given the continuing evolution of the pandemic and US/China relations, there is more than enough fuel for emotional traders to overreact to rumors and innuendo (both of which are in abundant supply). The could US loan cotton opportunities t take advantage of a fluctuating AWP relative to loan price, but be aware that if the AWP recovers above loan price, most US cotton will pick up 4-7 months of storage and interest charges that are currently forgiven. We encourage producers to take advantage of opportunities to sell equities and move bullish strategies to Mar or May 21 call options.
New crop forward contracting options remain lukewarm at best and currently offer no advantage relative to reasonable minimum prices at harvest. We believe producers are better served hedging a portion of expected new crop yield by way or insurance and/or puts and retaining their ability to take advantage of more attractive offers later in the season.
Have a great week!
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