ROSE ON COTTON – DEC COTTON FINISHES SIGNIFICANTLY HIGHER AHEAD OF AUG WASDE RELEASE
Louis W. Rose IV and Barry B. Bean
The ICE Dec cotton contract gained 231 points on the week to finish at 91.70, with the Dec – Mar inversion strengthening modestly to 37. The market closed an overhead gap on the continuation chart last week. 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.
The cotton market moved higher on the week on reports of relatively strong demand (although recent US export sales data have not necessarily supported such notions), lower production estimates for China, localized flooding across India, and technical market support.
For the week ending Aug 1, the US crop was rated in 60% good, or better, condition, which is off 1 percentage point Vs the previous assay period and notably higher Vs 2020. Further, only 8% of this season’s crop remains rated in poor to very poor condition. July’s heat wave is evident in dramatic improvements in many areas that were worryingly late in early July. Predicted hot weather in the coming 10 days should help the late crop catch up to maturity goals.
Most US cotton growers will likely only see light to moderate shower activity this week – and many growers will be more than ready for another round of showers/rain by the end of the coming week. With respect to tropical activity, this season has thus far been light, but the thrust of hurricane season has arrived, with tropical activity beginning to increase near the equator.
The USDA will release its Aug WASDE report on Thursday, Aug 12 at noon, ET. Currently, we expect the domestic balance sheet to show larger estimates of beginning stocks, production, and carryout for 2021/22. We do not expect a major change to the USDA’s projection of aggregate world carryout Vs the July report.
Net export sales were higher while shipments were lower Vs the previous assay period at approximately 20K and 238K RBs, respectively. New crop sales were lower at 158K RBs; the running total is approximately 400K RBS off Vs last year. The US is 107% committed and 97% shipped Vs the USDA’s 16.4M bale export projection.
With only two days left upon which to report, we expect US exports for 2020/21 to ultimately be pegged very close to 16M 480lb bales. The current rally in ICE futures has dampened price competitiveness for US cotton.
Internationally, monsoon rainfall has been good across India for much of the current growing season. Several of the nation’s production regions areas have experienced flooding over the weekend, threatening some portion of the crop. However, flooding in some areas is frequently indicative of abundant moisture across the balance of that same area.
China has now sold more than 1M 480lb bales from its strategic reserve this summer, with sales at an astounding 100% of those offered. We continue to hear reports out of China that the Xinjiang crop is below par this season, with a published survey showing a modest reduction in expected production Vs recent months.
For the week ending Aug 3, the trade trimmed its futures only net short position against all active contracts to approximately 16.1M bales, while large speculators increased their aggregate net long position to more than 6.7M bales.
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 Dec contract remain bullish, with the market now overbought. The Aug WASDE release is likely to be the market’s major focus next week.
Producers face a tough call in the coming weeks. A conservative and sober perspective suggests that prices above 90 cents are prices that promise a nice profit, and we cannot argue against selling for a profit. On the other hand, predictions persist of dollar cotton, and we understand how difficult it is to sell cotton when there is potential for another 10 cent up movement over the coming 60-120 days.
While we can’t rule out rallies to the dollar level, we continue to see thin air above the 93-cent level, and are noting the increasingly dire talk of COVID variants and associated shutdowns. Suffice it to say that a repeat of last year’s shutdowns and continued problems with the supply pipeline in virtually every commercial process is not a recipe for economic recovery, and the prospect of such will remain a wet blanket on the most optimistic market potential.
Given that, we continue to believe it makes sense to be 70% sold in the low to mid 90s, and go into harvest with 20-30 of estimated yield available for recap sales.
Have a great weekend!