ROSE ON COTTON – COTTON MARKET POSTS MODEST GAINS AHEAD OF WASDE RELEASE, KSU ECONOMIC STUDY POSES DANGER TO COTTON PRODUCERS
LOUIS W. ROSE IV AND BARRY B. BEAN
ICE July cotton picked up 43 points for the week ending May 8 to finish at 56.27 while Dec gained 10 at 57.62 as the July – Dec switch strengthened to (135), well short of 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. However, we did not recommend trading this bias, especially for new trades.
ICE cotton futures moved modestly higher last week on further confirmation of large export sales to China and expectations that the US would forego economic sanctions on China, if China performs on its Phase One trade accord commitments. Washington and Beijing are scheduled to discuss China’s progress in this matter in the coming week. Bankruptcy announcements by Neiman-Marcus and J. Crew (clothing retailers), strengthening US currency and yet another round of atrocious US initial unemployment claims likely kept ICE futures from moving higher.
USDA will release its May WASDE report on Tuesday, May 12 at noon ET. The monthly Bloomberg survey of analysts and traders shows an average expectation for the USDA’s initial domestic balance sheet for 2020/21 to project US production, exports, and carryout at 20.36M, 15.64M and 7.74M bales, respectively. World production, consumption and carryout are expected to be projected at 118.30M, 112.44M, and 91.29M bales. Our contributions to the survey were significantly more bearish Vs these average expectations. However, our proprietary balance sheet, which contains what we expect to occur Vs merely forecasting what USDA will project is much more constructive.
Domestically, USDA estimated planting of cotton at 18% complete, up 5 percentage points Vs the previous week. Planting progress is near on par with the rolling 5-year average and has escalated notably across the Mid-south. We expect gains in sowing progress for the region to be evident in next week’s report despite expected rain and showers across most of The Belt over the coming week. With respect to the weather forecast, dry areas within Texas and Oklahoma are expected to receive light showers while the Mid-south is expected to see accumulation of rain up to 1.5 inches. The southeastern states should see only light to moderate showers. Temperatures are expected to warm noticeably over the coming week, but the northern one half of the Mid-south is expected to see overnight lows at levels less than desirable.
As a point of interest on domestic production, researchers at Kansas State University (KSU), (the land grant institution of a cotton producing state) published an economic study in a peer-reviewed journal that purported to show some farmers were overcompensated by subsidies paid them in response to the US – China trade war. While the study estimates that nearly all crop subsidies were overly generous, none so lavishly as those paid to cotton producers. The research claims that cotton farmers were paid 33 times (3300%) the economic damage done to them by the trade war, mostly because of the large exports of the US crop, which, of course, was for sale to many nations other than the central kingdom.
We think that most US cotton producers would staunchly disagree. Had they had been surveyed, they could, perhaps, have shed some light on the subject for the economists undertaking this investigation. US producers might have reminded the researchers that, even if they were somewhat overcompensated by trade subsidies, they have also been disproportionately damaged by a World Trade Organization (WTO) case brought against them by Brazil (a nation whose average cotton producers is far wealthier than their US counterparts) in response to the Farm Bill as it applied to cotton. Ultimately, direct and counter-cyclical payments on cotton land were ceased for several years and were replaced (inadequately) via crop insurance initiatives while grains and oilseeds remain untouched.
We would like to remind or readers that the WTO is an entity born with the blessing of our esteemed leadership in D.C. and that it allows each country to select its own economic designation (developed, developing, etc.) without any regard to a nation’s hard economic data (the less developed a nation is the more favors/breaks it receives pertaining to trade). If you think this is ludicrous, you are more insightful than those in Washington who signed off on this farce. Missouri’s junior senator recently drew headlines for suggesting the abolishment of the WTO, and we concur.
Producers might also have opined to KSU researchers on the original North American Free Trade Agreement (NAFTA) that decimated the domestic US textile industry – almost overnight – as mills fled for cheap labor south of the Rio Grande and across southeastern Asia. In absence of this joke of a trade accord, US cotton producers would have been far less dependent on an antagonistic and enemy nation as a market for their cotton.
Given that KSU derives a portion of its funding through tax dollars paid by cotton producers (especially in Kansas) that that a significant portion of its mission is to extension and service to farmers, we are giving the authors and associates involved in the article in question a grade of “F minus”, but only because no lower grades exist.
Rumors and reports of business from China proved to be correct. The latest US export sales data against 2019/20 were lower Vs the previous sales period, but robust at approximately 373K running bales (RBs), while shipments were significantly higher at around 374K RBs. The US is 113% committed and 73% shipped Vs the USDA’s export projection. Both sales and shipments were well ahead of the average weekly pace required to meet the USDA’s export target. Sales against 2020/21 were lower at almost 56K RBs. Sales cancellations were large at around 56K.
Internationally, imports of raw cotton into China were off almost 31% in Mar Vs Feb at around the equivalent of 960K 480lb bales. President Trump has insinuated that if China makes good on its Phase One commitments, no further economic sanctions will be taken against the central kingdom. Data out of China (for what it’s worth/if you can believe it) show that the nation’s trade surplus expanded to $45.34B in April Vs less than $20B in Mar and the pre-report consensus of less than $10B.
Good for them.
Cotton stocks in India are expected to reach a 30-year high on continuance of shuttered mills and textile factories amid the current pandemic. In other news, the International Cotton Advisory Committee has projected 2020/21 world production and consumption at the approximate equivalent of 114.75M and 110M 480lb bales, respectively. Such a projection, if on-target, would be bearish.
For the week ending May 5, the trade trimmed its aggregate futures only net short position against all active contracts to approximately 4.3M bales while large speculators held their aggregate net short position very near unchanged at just shy of 2.1M bales. We infer from this that specs are indeed expected the May WASDE report to feature a bearish new crop balance sheet. Nevertheless, 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. The WASDE report will likely be the largest influencer of price action next week, and such is not expected to be friendly. However, another strong round of US export sales into China would likely offer support for the cotton market.
Have a great week!
Report Courtesy: Rose Commodity Group
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