2018-02-07 / Farm & Ranch


A Volatile Week for Cotton

February 2, 2018

Prices whipsawed many traders this week. Futures began with a continuation of Friday’s sharp losses, trading as low as 76.52 cents per pound by Wednesday morning. Thursday’s Export Sales Report ignited a flame below the market and briefly sent March 265 points higher on the day. Unfortunately, prices moved back quickly, with March futures settling at 77.30 today, down 318 points from last week. March futures led the way lower, while December ‘18 futures, which lost only 43 points this week, held up relatively well. The number of open contracts in the market fell sharply this week, but remained above the 2008 record. Open Interest declined 17,668 contracts to 303,076 as of Thursday’s close. Merchants Add to Certificated Stock

Certificated Stock, bales prepared by merchants for delivery against futures, has made its most significant increase in months. Since last Friday, merchants have added 19,291 bales. The amount is small by historical standards, but its appearance is a signal that the futures market has become the best-priced buyer for tenderable qualities of cotton. Certificating cotton is expensive, so merchants would rather not do it unless necessary. However, once cotton is certificated, the owner has the option of delivering it against short hedges or rolling hedges forward, which they will not do unless there is enough of a premium in forward markets to cover the additional cost of storage. Since few speculators wish to risk taking delivery of physical cotton, the growth of certificated stock makes holding long futures in the lead contract less attractive. Larger certificated stocks encourage speculators to exit, or at least to move futures purchases forward (e.g. to May futures) to avoid taking delivery. Index Roll Period Begins

Some of the major Index funds also began rolling their positions forward this week. Index funds hold passive long positions in a large basket of commodities. These funds owe their investors the price performance of that basket and have pre-stated rolling periods in which they transfer those long positions from one futures contract to the next. Since nearly all their futures purchased are sold and replaced with purchases in the next delivery month, their activ- ity provides more pressure on the relative price of the lead contract, which they are selling, versus forward contract months, where they are simultaneously replacing their purchases. In other words, Index Fund rolling was another significant factor in the sharpness of March’s decline versus other contract months. Ginning and Classing Continues

Cotton continues to flow into the market at a steady pace. Classing offices handled another 441,838 bales of cotton this week, bringing the season-to-date total up to 18,500,010. There are still more than two million bales left to hit USDA’s production target, but at the current pace, classing offices would hit the production forecast by mid-March. To date, 226 of this season’s 548 active gins had samples classed this week, including more than half the gins in Texas and all the gins in Oklahoma and Kansas. Unfortunately, gin capacity is still a major constraint in many areas, and classing will continue much later than normal. Surprising Export Sales Data

This week’s Export Sales report was enough to give the market a brief shot in the arm on Thursday. Despite March futures ranging from 81.61 to 83.95 over the reporting period, net new sales for the week ended Jan. 25 beat all expectations. Shippers sold a net 303,300 bales of Upland for this marketing year and 30,700 for the next, with broad demand from 24 countries. Cotton prices rallied sharply after the release of the report, with March trading back up to 79.93 cents by midday. Unfortunately, the rally was short-lived, and futures began to pull back fairly quickly. It seems some speculative buyers may have seen the spike higher as a good opportunity to exit rather than as a resumption of the upward trend. Bearish Factors

Last week’s poor Export Sales report, growth in certificated stock, and the beginning of Index Fund rolling were the perfect storm needed to challenge what was a nearly impeccable rally. Speculators had increased their long positions in March far beyond what mills needed to fix, and the price decline seems to have triggered what is profit taking for some and stop-loss sell- ing for others. Mills have used this opportunity to fix a large portion of their On-Call commitments, too. Yesterday’s Cotton On-Call report showed mills’ March commitments had declined 946,100 bales to 2.89 million as of last Friday, and mills are likely to have fixed a similar quantity this week as well. Although open interest rose elsewhere, the number of open March ‘18 futures contracts decreased 33,571 to 123,241 this week, which signals rapidly closing positions. It is a good thing that mills are getting the opportunity to fix at lower prices, since that will help consumption continue to grow. Nevertheless, mill commitments on May and July are still high and increasing. Outstanding fixation commitments could again become an issue soon. Planting Intentions Survey

The National Cotton Council (NCC) will hold its annual meeting next weekend. At that meeting, the organization will release its highly anticipated and respected Planting Intentions Survey results. NCC’s survey will be the first of many early estimates of 2018’s U.S. planted acres and is likely to be used by many analysts as the starting point for early 2018 projections. Larger planted acreage is almost universally expected, as cotton prices have significantly outperformed grains for the past two seasons. While larger planted acreage may lead some market watchers to reflexively predict higher production for next year, it is important to note, as experienced traders already do, that harvested acres are what count. With the current drought in the Southwest, planted acreage predictions should receive less weighting than usual. Reports to Watch

The week ahead is a busy one. Not only will traders continue to watch closely the daily certificated stock levels and the weekly export sales report, they also will have to watch carefully the February World Agricultural Supply and Demand Estimates. USDA seldom changes U.S. production in February, but the U.S. export estimate and global production figures are still game. Next week also will feature more Index Fund rolling and the expiration of March options contracts at Friday’s close, which certainly will keep most merchants busy tending to their hedge books.

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