Prices were under pressure all week as Brazilian export offers undercut the market and drove prices lower. Lower New York ICE prices did enhance interest in U.S. export offers and uncovered new business. Additionally, mills stepped up their fixations against on-call sales, and this supported new crop December futures contract trading near 77 cents early in the week before dropping below 76.25 cents into the weekly close.
The technical trading channel remains in play, but prices are now working the lower end of the channel. Other than welcome moisture in the U.S. Southwest and the increased export challenge from Brazil, no other fundamentals appeared to surface. Going into the weekly close, December futures prices were facing a near 80-point loss on the week, while the spot month July was down about 40 points on the week.
December was some 25 points below the mid-point of its three-week 75.26-77.75 cent trading range. The July contract has seen a three-week trading range of 76.30-79.57 and settled the week about 28 points below the midpoint of that range at 77.70 cents.
The principal concern, based on the week’s trading, was that open interest declined all week. Yet, there appears to be a strong taker for all the certificated stocks being delivered against the expiring May futures contract. This suggests that the merchant in question has an order book flush with export business, as the stocks represent the highest quality of any U.S. cotton remaining for export. Yet, declining open interest and declining prices can quickly spell doom for the bulls (the implication: traders are running for cover, i.e., liquidating or selling long positions).
However, the two big planting months in the northern hemisphere are still in front of us. May will see most of the U.S. cotton planted. Too, plantings across the U.S. Southwestern region will stretch into June and filter into early July. Most of the Southwest received very adequate showers on the week. Mother Nature – assuming she will now hold off with her moisture in the Mid-South and Southeast – has likely done those growers a favor by keeping them out of the field during April. Generally, a May planted crop in those regions emerges with more vigor to push through the perils of a newly-planted crop.
Nevertheless, the market will continue to face planting scares at least through the first three weeks of May as flood waters along the Mississippi River and her tributaries will continue to create havoc with plantings. Other northern hemisphere crops, particularly India, will be actively planted through July and into August.
Should final plantings reach the USDA intentions estimate of 13.8 million acres, and the favored El Nino as has been forecast blesses the U.S. crop, then the market will shed its bullish flavor and production prospects for a 22 million bale U.S. crop will begin to mature. Additionally, weather prognosticators have also called for a positive monsoon season in India, which will favor crop’s development.
Our pricing strategy of holding off further sales for 79-80 cents, basis December, was predicated on prior calls for sales – first 84 cents and then at 75 cents. However, for any grower not already at least 50% priced on their 2019 crop, they are advised to move sales to that point at the current price level – that is, above 75 cents.
Specifically, growers should not “hold and hope” for a near-term resolution for any settlement of the U.S./China trade battle. While such could come this week, it is very doubtful, and you are reminded that the dispute has never been about agriculture. Thus, agriculture holds no solution to the dispute. There could be some “window dressings” for agriculture such as a guaranteed level of purchase by China that may make for a nice new shiny toy. Yet, we are also reminded that, historically, such toys are nothing but window dressing and never come to fruition.
It is time to be at least 50% hedged for new crop.
Give a gift of cotton today.