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Lethargic Prices Have the Market on Edge

Lethargic Prices Have the Market on Edge

Cotton prices broke out of its principally lethargic 73 to 75 cent trading range this past week. Unfortunately, it was to the downside.

This past week, the March contract has been in a 318-point trading range (7271-6953) – the largest of all the months trading due to massive liquidation ahead of first notice day on February 22. The low of 6953 was the first time since November of 2017 that the nearby contract had been below 70 cents.

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For the first four days of the week, volume totaled 267,249 contracts, and 83% of that volume was on spreads, principally March/May. Coming into February 11, March open interest was 71,701 contracts, and coming into February 15, it had dropped to 30,200 contracts. The March/May spread has gradually worked its way out from a close of 121 on February 11 to 158 points by February 14.

Heavy liquidation in March open interest, combined with a widening spread, is not a bullish sign.

So, what happened on the 11th that did not happen on the 15th after USDA released their supply/demand numbers? Those numbers weren’t overtly bearish, but by no means were they friendly. The National Cotton Council released their acreage survey on February 9, showing a 2.9% increase in plantings to 14.450 million acres or 408,000 acres larger than this year. In and of itself, this number was pretty much expected (at least an increase was expected), but maybe finally seeing it in print put traders on edge.

Too, the continued unease over China/U.S. trade talks have folks on edge, as well as the thought the government would potentially shut down again. This unease, along with heavy March liquidation, pushed prices below technical levels which led to more selling. And by the way, the U.S. dollar has rallied about 2% since the end of January. So, a lot of stuff in the air finally pushed prices over the edge.

During the week, a compromise bill which will keep the government open was reached, despite the President not getting the border wall funding. He did sign it on February 15 and announced he would declare a national emergency in order to obtain border wall funding elsewhere.

Also, on the 15th, a significant Dow Jones rally was attributed to good news regarding trade talks and the thought that Trump would extend the deadline for a further increase in tariffs by 90 days. This has calmed the markets, and cotton has appeared to find a bottom for now. The talk around these talks, though, is that cotton has little to no voice. Corn, soybeans, dairy, beef and others all have bigger voices than cotton.

It may be an early declaration, but U.S. cotton has permanently lost export business to China. No doubt additional sales will come (and have come), but they will come in the form of canceling higher-priced sales and replacing them with lower-priced sales.

And it makes sense to do so. Cancel the higher-priced cotton, buy the lower-priced cotton and pay the tariff. Since the government has re-opened, USDA has released three weeks of export sales numbers, and those have shown net sales to China of 68,100 bales, including Pima. Too, sales have been good in other markets as well. Total export sales over the same period has been 923,200 bales.

Since the market is closed February 18 for a Federal holiday, the export report will be released on February 22. It will contain six weeks of data and will completely catch up the export numbers.

What can we expect to see in the report? It would be tempting to say 1.5 to 2 million bales in additional sales based on the latest data. But reports out of the countryside say things have slowed down. We can see it in the March/May spread deterioration and the break in the market this week has made mills nervous. Still, business is going on, but mostly in the lower-priced cotton. Mills need cotton. They just can’t afford a high landed price.

Too, if they sense that prices have bottomed, there will be interest in additional mill buying. For all practical purposes, the attention must be focused now on the May contract. The March contract looks a little better poised to rally as opposed to the May contract.

The coming week could bring a narrowing of the March/May spread, meaning a potential taker of cert stocks against limited delivery notices. It could be a very interesting week.

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