All Eyes on the Southwest as Contract Periods Shift
April 20, 2018 Cotton trading turned a bit puny all week, as the May futures contract moved closer to expiry and the July contract prepared to become the spot month.
Open interest in the May contract has quietly dissipated. Thus, any expected fireworks on the May contract have been all but abated, and the expiry will be silent. Delivery notices can be issued at the conclusion of trading on April 23. However, the July contract remains supported by the bullish on-call sales report, as the on call-sales to on call-purchases ratio is 9.4 to 1.
Yet, in and of itself, that is not powerful enough to move prices higher. Some additional supply demand factor will need to be uncovered if the triple top is to be breached. While I do not feel old crop can climb to 90 cents, it is possible that new crop could challenge that lofty perch.
Exports continue to provide favorable support to the market. Another way to phrase that is world demand for cotton continues to increase. (The most recent weekly export sales and shipments report can be viewed online.)
Demand for cotton continues to increase despite the two largest sports leisurewear manufacturers – Adidas and Nike – continue to preach polyester despite the sustainability problems of using a gasoline derivative fiber. Universities and schools continue to pour the gasoline derivative fiber over their student athletes in a simple attempt to chase a dollar bill. This continues despite the increasing level of scientific research that points to personal health problems, as well as the documented and rapidly-increasing pollution being created in lakes, fields, streams, rivers, oceans, food animals and humans.
We began this discussion two years ago and ruffled feathers, as the polyester leisurewear money was just too easy to forego by so many. We have been silent on this subject for some time. But now, the research intensity is global, and acid-based polyester pollution has even caused some governments to require that polyester garments carry a health warning label.
The triple top formation sitting on the top of the July contract will most likely hinder any price advance above 86 cents. Look for July to spend the remainder of its life trading between 80 and 86 cents. First notice day for July contract is June 25, leaving 44 more trading sessions before the July delivery phase begins. Therefore, the potential is high for the remaining trading days of the 2017 cotton crop to pass quietly.
However, there remains an outside possibility that the 90 cent level can be breached. The new crop (2018 production) December contract held above 78 cents, moved higher and then established a new life of contract high at 79.34 cents.
As we have repeated numerous times, Mother Nature and her willingness to drop water on the Southwest plains (Texas, Oklahoma and Kansas) will dictate the direction of price movement, as well as the strength of any such movement. The threat of weekend rains in West Texas kept December under minimal pressure all week, but the expected rain event appears weak. Additionally, Texas District 1-S, a major production region, is rapidly becoming a region of exceptional drought.
Essentially the major production areas in the three states are either suffering from exceptional or extreme drought, meaning more than just a good one inch rain will be needed. Without several timely rains, the December contract will breach the 80 cent level.
While the moisture situation facing the Southwest is always a critical issue for price direction, it is even more so this year. I stand to be corrected, but the Southwest will account for a greater share of U.S. plantings in 2018 than in any prior year. Too, nearly all of the increased U.S. plantings will be in the Southwest. Improved moisture events will pressure prices lower.
Additionally, world textile mills are demanding more high quality cotton. And, if the drought even somewhat plays out in Texas, then the potential for micronaire problems will be enhanced, and the availability of high quality will be even more limited – thus, pushing New York futures higher. Too, world ending stocks for 2018-19 are expected to decline. This will cause ending stocks to ease lower for the fourth consecutive year.
Look for the market to keep 2018 crop prices in the mid-70s to mid-80s. Remember, however, as we have said time and time again – if you like the price enough to plant, then like the price enough to sell some. We have suggested pricing as much as 35% of your expected production at 78 cents or better. So, if you were wrong, then maybe you can sell the remainder above 85 cents.
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