The bulls took it on the chin again this week in what has seemed like a race to the bottom, which is something that we discuss later herein. The Dec and July contracts gave up 318 and 381 points on the week, respectively, while the July – Dec switch finished the week at and inversion of 252 – 57 points off last Friday’s settlement.
At this time last week, USDA had released its June WASDE report. No doubt the supply-side of the government’s updated balance sheet (2017/18) was bearish, but we took solace in the fact that the demand side was enhanced, as well.
We were not the only analysts to take this view. However, ICE’s participants, in aggregate, did not don their rose-colored lenses this week.
So in the end, at least with respect to the July contract, the bloated spec net long position trumped the notably overdone mill on-call position that had been heralded by so many as the safety net for ICE old crop futures. Maybe the mills are just more adept at poker.
US old crop export sales have slowed, which was not only expected, but inevitable. By our back-of-the–envelope calculations the US has only around 500-700K bales of old crop bales remaining for sale (after accounting for early shipments in the upcoming 2017/18 marketing year) and 476K of this figure are currently certificated for delivery against the ICE July contract.
At current price levels, we think that these stocks are tempting some members of the trade.
But the pace of shipments did slow over the most recent assay period. While still strong at over 230K running bales, our models suggest that the 2016/17 US exports will likely be realized at 14.1 – 14.25M bales rather than 14.5M.
US export sales against 2017/18 continue to impress – nearly 200K running bales for the week ending June 8 took the upcoming marketing year’s sales tally to nearly 3.5M bales, a staggering figure.
On the production side, the 2017 US crop is far from made, even is South Texas has produced the year’s first harvested bale. We are beginning to hear more and more grumblings and less optimistic field reports from our friends in West Texas.
Extreme temperatures, excessive winds and lack of moisture are beginning to stress the young cotton crop. Any moisture over the past week has come from hit and miss afternoon showers that have produced mostly light rainfall accumulations.
As we have mentioned in our daily reports, it now looks as if abandoned acreage is on the rise as some dryland planted acreage has simply not had enough moisture to produce a viable stand of seedlings. More heat is in the forecast with high temperatures ranging from 100 to 109 degrees expected over the next week.
A nice general rain is needed – and quickly – over a large portion of the Texas cotton crop.
Other regions are reporting less than ideal conditions as well.
- The desert Southwest is forecast to experience a record-setting heat wave, and the
- North Delta continues to show evidence of late planting, poorly timed rains and heavy thrips damage.
Considering this, those producers who are gamblers by nature have reason to be cautiously optimistic about their chances for yet one more bite at the apple. But make no mistake, producers with unfixed, non-hedged and/or uninsured cotton are gamblers from this point forward.
The most promising strategy we’ve heard in recent days involves using a combination of Dec puts and rule 5 (FOB for our friends in Texas) contracts to take advantage of any return to 73.00 or better on the Dec contract, with an eye towards taking an LDP/POP payment at harvest if the crop survives its rocky adolescence and produces the yield many were predicting a few weeks ago.
Producers opting for this strategy should circle June 30 on their calendar and make it a point to monitor the planted acres report and the market’s reaction to that number. Outside of a major weather or political event, that offers the next substantial opportunity for a rally. If that doesn’t inspire a rally, plan on a long conversation with your local buyer after the Fourth of July to craft a new summer strategy.
For next week, the standard weekly technical analysis for and money flow into the Dec contract are bearish, but the market is also in a much oversold condition. The market should begin preparing for the USDA’s annual June 30 acreage report next while keeping one eyed trained to the skies – especially over West Texas and Oklahoma.
Have a great weekend.