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It’s a Wonderful Day in Cotton’s Neighborhood

With apologies to Mr. Rogers, it’s a wonderful day in the neighborhood, and the cotton market has been mine.

What a roll! Despite the bearish interpretation of the past two WASDE reports, price action on ICE has clearly demonstrated that price decisions should be focused on the declining level of world stocks and the ever-increasing world demand. Yet, it is difficult not to focus on “today’s” fundamentals suggesting on the big U.S. carryover. However, that is why the WASDE is released monthly. It offers a dynamic and a fresh look at fundamentals and instills in us that we must constantly and critically review the world supply demand situation.

With the bulk of the U.S. crop demand coming from the export market, the issue becomes one of world demand, world carryover and world trade. Those overshadow the traditional importance of focusing on U.S. carryover. Too, mill demand for U.S. growths, due to specific country supply and demand issues, is increasing with respect to other growths. The U.S. carryover, traditionally a bellwether indicator of price activity, is not the key price indicator it has been the past several years. Demand has surfaced as the key indicator.

Many will suggest that export demand has been strong the past two years, and I agree. Yet, world demand has surfaced as the key price indicator. Too, I am of the strong opinion that USDA will eventually increase its 2017-18 world demand estimate some 1.2 to 2.0 million bales and reduce its estimate of Indian carryover. (This could be done either by increasing 2017-18 demand or by adjusting demand several years back, but likely both. USDA has become more proactive in adjusting historical estimates. Note this month’s adjustment in historical Indian consumption. I do hope they continue that endeavor.)

The market has suggested that the USDA reports were more bullish than most expected and have solidified the market’s quest to trade a 70.50 to 78 cent trading range. That being said, we should expect trading within the range to be volatile, with most of the trading in the 72 to 76 cent range.

The market continues to be supported by excellent export sales and the mills’ desire to buy cotton on-call at the very positive basis levels offered by U.S. merchants and cooperatives. In kicking their pricing decision down the road, mills have amassed an exceptionally large, near-record large on-call sales position. This continues to offer excellent price support to the market and will continue to do so. Total on-call sales now stand at 14,748,400 bales on a crop of 21.6 million bales. That can be discounted by the some 4 million bales that will not meet certification grades. Thus, these on-call sales may be even more bullish than I suggest.

Returning to the demand side of the price equation, weekly export sales totaled a net 259,700 RB of upland, 10,200 RB of Pima and 49,700 RB of upland for 2018-19. Thus, sales were exceptional and verify why I have continued to indicate that the world will need another 20 million-plus bale crop from the U.S. in 2018 and 2019. Upland shipments were solid at 166,600 RB.

Earlier, we tweeted that 76 cent calls should be sold, taking the profits on the calls purchased a month ago, and that 75-76 cent physical fixations should be made with the intention of 1) reestablishing the calls between 72 and 73 cents, and 2) buying calls to replace the physicals once the March contract fell back to the 72-73 cent level.

Growers should look to purchase July calls. We have long recommended the selling of physical cotton and replacing it with July call options, ever since Joe O’Neill, president emeritus of the New York Cotton Exchange, popularized the strategy in the late 1980s. That advice has proven to be stellar in almost all years. The total gain has far, far surpassed the very limited number of years when a profit was not made.

Granted, some growers will want to hold their high grades, since the quality premium will be substantial. However, they will face storage charges which will likely erode much, if not all, of the premium advantage.

It is a close call, but selling physicals now and purchasing a 3-cent out-of-the-money July call option once the market falls back to the 72-73 cent area should prove to be the most profitable, especially for growers that bought calls some two months ago.

Give a gift of cotton today. And Merry Christmas, Happy Holidays and Happy New Year!

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