Just how dismal are prospects for cotton prices?
“Give a gift of cotton today,” is the suggestion of OA Cleveland, professor emeritus at Mississippi State University, if prices of the fibre are to escape the pressure which saw the spot March contract slump nearly 4% in the last session.
“How bad is demand? Consider that Macy’s offered a $9 men’s dress shirt sale – buy three, and shipping was free,” he told Cotton Grower.
“Demand is on life support, as is hope of upward price movement.”
“For now… 60 cents a pound and lower is frozen in the glass,” as far as cotton future prices go, he said.
Tobin Gorey of Commonwealth Bank of Australia was not exactly upbeat either, if suggesting “a glimmer of hope that perhaps prices are at, or at least close to, the trough of the cycle”.
“A demand response to weaker cotton prices is not yet visible.
“Apparel companies make their production and input decisions well in advance so the ‘fashion shift’ back towards cotton is unlikely to occur until later this year at the earliest.”
‘Much more upside potential’
Still, at least, Louis Rose at the Rose Report offered cotton bulls some reassurance, saying that, for old crop, “we continue to see much more upside potential for the old crop than we do downside risk.
“Technically, our proprietary analysis suggests that May futures will likely either consolidate or move somewhat higher over the near-term.”
And for new crop, as measured by the December contract, while a small decline is “possible… it seems far more likely to us that a pre-planting rally or a summer weather market could improve new crop prices by several cents.”
And certainly, spot New York cotton futures did manage some recovery in early deals, with the March contract up 0.5% at 58.00 cents a pound as of 09:35 UK time (03:35 Chicago time).
But the better-traded May lot, which lost a more modest 1.4% in the last session, eased by 0.02 cents a pound in this one to 58.67 cents a pound, while the December contract fell by 0.03 cents to 58.89 cents a pound.
‘Fireworks are about to begin?’
The ructions in the cotton market, however, illustrate two broader themes in ag markets for now, the first being the forthcoming expiry of March futures contracts in both New York and Chicago.
This can often be a period of volatility as investors decide when to close out their last positions, trading volumes drop, and considerations of delivery of physical crop against futures hold sway too.
In New York-traded raw sugar, CBA’s Tobin Gorey noted that “market chatter now seems focused on next Monday’s March expiry and the quality of the sugar that will be delivered.
“Effectively that means – what sort of discount [of the expiring March contract to the May contract] does a potential receiver need for a profitable combination of carrying the sugar and blending it up to a quality that enough refiners can use?
A “surge” in the discount late in the last session, when it ended at 0.15 cents a pound, “coming right at the end of the day, might mean the fireworks are about to begin”, Mr Gorey said.
Certainly, the spread had closed markedly in early deals, and looked to have a role in sending flat prices higher, with the March contract at 13.10 cents a pound, a gain of 4.0% on the day, and the May lot at 13.13 cents a pound, up 2.9%.
Also helping prices was a request by the head of Imperial Sugar (part of Louis Dreyfus) for extra US raw sugar import quota, potentially of 500,000 tonnes, thanks to a squeeze on domestic feedstock supplies.
Big data ahead
The second theme that cotton is illustrating, thinking of new crop, is the prospect on Thursday and Friday of the US Department of Agriculture’s annual outlook forum, when it unveils updated estimates for domestic crop balance sheets for 2016-17.
These are more considered forecasts than the so-called “Baseline” estimates restated last week (and actually drawn up around November time).
And one factor that will be closely watched is how the USDA allocates the “lost” winter wheat seedings – ie the unexpectedly large 2.9m-acre drop in sowings of the crop unveiled by official data last month.
The lower winter wheat area “should push USDA corn and soybean planted area forecasts modestly above their Baseline estimates”, said Richard Feltes at broker RJ O’Brien.
That said commentary in last week’s Baseline report said that “lower crop prices in the near term will result in reduced planted acreage”.
Mr Feltes said: “Thus we do not expect any surprise gains in total 2016 US crop planted area on Thursday.”
‘Excessively wet soil conditions to diminish’
Still, grain prices were a little weaker in early deals, with soybeanfutures for May down 0.4% to $8.81 a bushel, retreating back below their 100-day moving average.
The decline came amid optimism over South American weather, despite flooding in Argentina, with the sanguine sentiment helping send corn futures for May down 0.3% to $3.71 a bushel too.
“Meteorologists do not seem too concerned over the volume of recent rainfall in Argentina, despite several provinces being declared flood emergency zones,” Mr Gorey said.
“They expect that excessively wet soil conditions will diminish as a somewhat drier bias unfolds over the next 10 days.”
Benson Quinn Commodities said: “Conditions are expected to remain favourable for the bulk of the South American production.”
Furthermore, there was seen as something of a one-off technical factor related to the gains of the last session, reflecting the extent of March options not exercised at expiry on Friday, in essence leaving many investors with an unhedged short position in the futures.
“Offering support on Monday was 8,000 at-the-money puts that were not exercised with Friday’s expiration,” said Benson Quinn Commodities.
“For those that were short the put, they sold the market on Friday anticipating taking or going long the futures.
“But since those options were not exercised, the ones holding the short put position ended up naked short the futures, hence the rally on Monday as they covered shorts.”
In fact, Chicago soft red winter wheat futures, which underperformed in the last session, fared better in this one, with wheat for May up 0.1% at $4.64 ј a bushel.
That said Kansas City hard red winter wheat futures for May were down 0.2% at $4.62 ѕ a bushel, reopening their discount, which temporarily disappeared in the last session, when concerns for dryness in the US Plains, where the variety is grown, were still in the ascendancy.
Better rain prospects have undermined the dryness concerns a bit.
Terry Reilly at Futures International flagged the depressant effect on prices of “a precipitation event to impact the western Great Plains and some of the southern winter wheat-growing areas”.
Crop condition falls
However, not all observers are so convinced, with Mark Welch at Texas A&M University saying that while “beneficial” rains are in the forecast for most of Oklahoma and Texas over the next few days, the forecast returns “dry” afterwards.
And this after some parts of western Oklahoma and the Texas panhandle “have not had a quarter of an inch of rain in over two months”.
This is evident in weekly ratings for Texas winter wheat, of which 41% are rated “good” or “excellent”, a better-than-average reading for the time of year, “but down from 55% five weeks ago”.
(Source – http://www.agrimoney.com/marketreport/am-markets-cotton-struggles-sugar-soars-as-expiry-nears–3513.html)