ROSE ON COTTON – COTTON MARKET CRASHES DESPITE TIGHT ESTIMATES AND PROJECTIONS OF US CARRYOUT
LOUIS W. ROSE IV AND BARRY B. BEAN
The ICE July cotton contract crashed on WASDE week, giving up 723 points to finish at 82.43 as the July – Dec inversion weakened to 121. The Dec contract lost 567 points, finishing at 81.22. 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. However, we did not recommend trading this bias ahead of the WASDE release.
Traders discounted bullish updates to the USDA’s domestic S&D balance sheets, and focused instead on weakening export data, weakness in equities and other row crops, and the prospect of more rains and showers across West Texas. Index fund selling/liquidation also exacerbated weakness in the market.
Domestic planting progress remains on par with the expected pace, but the Mid-south remains significantly off its rolling 5-year average pace. Still, planters are rolling now amid a stretch of mostly favorable weather. For the coming week, potentially significant rainfall is expected across West Texas, Oklahoma, Kansas and the Mississippi River Delta while the southeastern and southwestern states are expected to see mostly clear skies.
In its May WASDE report, the USDA projected 2020/21 domestic carryout off around 600K bales Vs April to 3.3M bales, which was smaller than expected. The adjustment came via a 500K bale enhancement to the official export target to 16.25M bales and a small downward adjustment to 2020 production. With respect to 2021/22, USDA projected US production, consumption, exports, and ending stocks at 17M, 2.5M, 14.7M, and 3.1M bales, respectively. The market did not seem to take these figures to heart.
Aggregate world carryout for 2020/21 was projected 300K bales lower Vs April at approximately 93.16M; regarding 2021/22, USDA projected world production, consumption, and ending stocks at 119.44M, 121.48M, and 91M bales, respectively. We continue to disagree with the USDA on consumption. Inflation, the likelihood of increasing interest rates, continued pandemic shutdowns, increasing energy prices, and irresponsible governmental fiscal behavior makes for a poor environment for the consumption of textiles and other semi-durable goods.
US cotton continues to struggle for business against major export competitors. Net export sales and shipments were lower Vs the previous assay period approximately 58K and 297K RBs (MY high), respectively. New crop sales were higher at around 72K RBs; running total is now 1.81M RBs Vs 2.53M last year. The US is 100% committed and 77% shipped Vs the USDA’s revised 16.25M bale export projection. Sales were ahead of the average weekly pace required to realize the USDA’s target while shipments were just off the pace requirement. Sales and shipments are ahead of the long-term average pace for this point in the season. Cancellations were negligible.
Internationally, Conab estimated Brazilian production 2% lower Vs April at 11.2M 480lb bales; USDA projects Brazilian production slightly higher at 11.5M bales.
For the week ending May 11, the trade slightly increased its futures only net short position against all active contracts to around 15.33M bales while large speculators reduced their aggregate net long position to around 5.55M bales. The spec position remains stacked in a bullish manner, which could lead to significant liquidation in a very quick fashion. However, we expect some such liquidation has occurred over the last three trading days.
For an in-depth analysis of CFCT data see our weekly CFTC analysis and commentary.
For next week, the standard weekly technical analysis for and money flow into the July contract have turned bearish. The weekly US export report, weather forecasts and conditions, planting progress are likely to be potential market moving factors next week.
In last week’s column, we noted that producers got another bite at the apple with the late April rally to 8700+, but also noted that we expected high volatility through May and early June. This week certainly didn’t disappoint. Friday’s dip below initial support at 8175 is concerning, but it is hard for us to make the argument that we’ve seen the last of the mid to high 80s. Seasonal volatility and (over)reactions to the Lubbock forecast should continue to be major factors for the Dec contract, making any number between 7800 and 8800 a reasonable target between now and the June 30 planted acres report. With at the money Dec options trading in the 600-700 pt range, we’re clearly not the only market observers who expect continued volatility.
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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