Are Higher Cotton Prices Likely in the Fall?06/20/2016
ICE cotton had a strong second half of the week, ultimately picking up 85 points and settling just south of demonstrated resistance near 66.50. The Dec – Mar spread closed the week at 17 points carry and is threatening to invert.
Despite tightening carry, though, demand is simply not the driver of our market’s support. The most recent US export report was lukewarm, at best, with sales slowing as prices rose. ICE certificated stocks also continue to accrue, revealing the board to be a viable delivery option for those holding quality physical stocks.
The Fed’s decision to forego an interest rate hike in June (many pundits believe that perhaps only one more token increase will be put forth in 2016) combined with strength in the grain markets has also helped cotton’s case.
It is almost an axiom that a bull market driven on supply worries will never be as intense as is one driven by the demand side of the equation, much less one that is incited by the combination of a supply squeeze/demand pull scenario. Still, we remain friendly for the Dec contract to take out last year’s high of 68.11.
Say what you will about the US crop, we still believe that acreage is likely to slip Vs the USDA’s Mar 31 projection and abandonment is likely to increase.
In many regions, we are not off to the best start ever, although moisture is currently reported as plentiful across West Texas, the largest US production region. But temperatures are soaring across the areas surrounding Lubbock, and will likely threaten the century mark across the Midsouth next week. Extreme temperatures are not necessarily troublesome, so long as nighttime temperatures retreat into the upper 60s/low 70s, but they do increase the need for more frequent precipitation and irrigation.
Internationally, aquifers across Australia’s cotton producing regions are reportedly in need of further recharging ahead of the fall planting season. In Brazil, the current soybean and cotton price structures are likely to favor more second crop planting of cotton than that for first crop, which should ultimately reduce the nation’s production potential. Weather conditions have reportedly been less than favorable for this season’s crop across much of China and monsoon rains across India and Pakistan continue to stall. It is hot and dry across portions of the Former Soviet Union, as well.
And, finally, China announced its intentions a while back to purchase high quality stocks for its strategic reserve in an effort to build quality levels. These domestic purchases are expected to commence shortly after reserve auctions end for 2016 in Aug. Perhaps this quasi-artificial demand is just enough to propel a market currently focused on uncertain production and quality higher.
Producers could understandably review the situation and come to the conclusion that higher prices are likely in the fall. We wouldn’t disagree. But we’ll reiterate last week’s observation that with Dec at the money puts trading in the 300 pt range, we believe wise growers will hedge a portion of their crop against rallies to the upper 60s. If and when forward contracting options become attractive again (possibly following the June 30 report), producers can re-evaluate the merits of hedging vs selling, but for now we believe the option pit is the way to go.
For next week, the standard weekly technical analysis for and money flow into the Dec contract remain bullish, but the market also remains in overbought territory. Export sales for the week ending June 16th are likely to be improved Vs data put forth this week. Increased volatility could arise both before and after next week’s vote by Great Britain on whether or not to remain within the European Union. Finally, traders may begin to do some evening up ahead of the June 30th acreage report.
Source: Louis W. Rose IV, The Rose Cotton Report