ROSE ON COTTON – COTTON MARKET CONTINUES TO DEFY BEARISH NEWS AND DATA, CHINA STILL BUYING US COTTON DESPITE INCREASING TENSIONS WITH USA
LOUIS W. ROSE IV AND BARRY B. BEAN
ICE July cotton picked up 198 points for the week ending May 15 to finish at 58.25 while Dec gained 55 at 58.17, as the July – Dec switch strengthened – and inverted - to 8. 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 ahead of the WASDE report’s release, and that report did not convey a bullish sentiment to us.
ICE cotton futures moved higher despite an incredibly bearish new crop balance sheet release in the May WASDE report, continued purchases (especially of tenderable stocks) by China, and USDA projected world offtake for 2020/21 of nearly 116.5M bales. Strengthening US currency (which is again trading above par), weakness in equity markets, a bankruptcy announcement by retailer J.C. Penny, and a nearly 79% dip in US clothing sales in April Vs Mar seemingly did little to apply drag to July futures. Nor did an additional 3M Americans joining the ranks of the unemployed. That cumulative total is now thought to be approximately 36M, or roughly one in 10 Americans.
Other bearish developments included President Trump’s statement that he is not yet ready to negotiate with China regarding Phase Two trade negotiations, his frustration over China’s handling/mismanagement of the Wuhan pandemic being evident in his comments. They were also evident in his actions as he banned US semi-conductor sales to telecommunications giant Huawei for another year and further banned them from using Google applications. The move, which certainly seems the correct action to take with respect to a hostile (or at least unfriendly/antagonistic nation) is certain to draw China’s ire as Huawei stock falters.
In fact, China has suspended all beef imports from Australia in response to Aussie recommendations for an official investigation into how China handled the pandemic while it was contained within their borders. That is to say that China was the first line of defense – when the balance of the world could have come to their aid in trying to thwart the disease – and they did not perform admirably.
It certainly looks as if the CASDE (China Agricultural Supply and Demand Estimates – not the originality of the title) impacted the cotton market on Tuesday more so than the vaunted WASDE. The report showed agricultural officials in the central kingdom expect production to be off around 2% Vs 2019 while also expecting raw cotton imports to increase 300K MTs Vs April to the equivalent of 9.2M 480lb bales.
In its May WASDE report, the USDA projected 2020/21 domestic production, exports, consumption, and carryout at 19.5M, 16M, 2.9M and 7.7M bales, respectively. 2019/20 production was estimated at 19.91M bales and consumption was slashed to just 2.7M. These projections are, to say the least, bearish. We were shocked by the USDA’s entirely reasonable projection of 2020 domestic production, and the degree to which the new crop balance sheet resembles the one we sent out last week. We were pleasantly surprised to see the USDA using numbers and assumptions shared by the trade.
Aggregate world consumption was slashed to approximately 105M bales for 2019/20, but consumption was shown to be expected to rebound robustly in 2020/21 to almost 116.5M bales. Carryout for 2020/21 was projected almost 100M bales, which is more bearish than the domestic carryout projection. Still, we think the USDA’s aggregate world production projection of almost 119M bales seems ambitious, at least to us.
Domestically, USDA estimated planting of cotton for the week ending May 10 advanced to 32% complete, up 14 percentage points Vs the previous week. Overall, planting progress is just ahead of the rolling 5-year average pace, despite slow progress across the Mid-south. Modest rainfall is expected across areas of West Texas, Oklahoma and Kansas, as well as the Mid-south over the coming week
Further rumors and reports of business from China again proved to be correct. Still, the latest US export sales and shipment data against 2019/20 were notably lower Vs the previous sales period, at approximately 239K and 250K running bales (RBs), respectively. The US is 114% committed and 75% 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 82% of the pace requirement. Sales against 2020/21 were higher at almost 95K RBs. Sales cancellations were modest at around 14K.
Internationally, reports out of India suggest that mills are beginning to re-open as the nation tries to re-ignite its economy. The USDA’s attaché in India has projected this season’s production at 28.5M bales, which matches the USDA’s latest official projection. In Brazil, Conab held its current crop production estimate near unchanged Vs April at around 13.1M bales. Elsewhere, the total value of China’s textile exports were reported nearly 38.5% higher in April Vs Mar, which, if true, is encouraging.
For the week ending May 19, the trade modestly increased its aggregate futures only net short position against all active contracts to almost 4.5M bales while large speculators significantly reduced their aggregate net short position to approximately 1.6M bales. Given market action since Tuesday, we expect the aggregate spec net short has been significantly further reduced.
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. Planting progress, weather reports, US export sales data, pandemic updates, and news regarding US – China relations likely each possess market moving potential for the coming week.
Producers holding old crop got a cool reception from buyers thus week. While there are still bids, the major merchants who had been aggressively building inventory for the past two weeks widened their basis and gave every indication that their inventories were sufficient for mid- to long-term needs. We continue to believe that producers are far better off with money in their pockets than cotton in the warehouse at this point, and remind the few remaining bulls that if the market rallies more than a few cents, storage and interest will come due on old crop equities, negating improvements in futures.
Prices for new crop are currently in a range near expected minimums in the fall. The farm program essentially puts a floor under cotton at loan levels, and we see no reason to commit to a contract that does not offer substantial advantage over a one to five cent equity. Insurance and options represent a far better way to try to carve out a few extra cents while maintaining flexibility to respond to ever changing market conditions.
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.
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