NY futures traded sideways this week, as December moved just 29 points higher to close at 60.60 cents/lb.
After falling through the cracks last week, the market was able to regroup just north of the 60 cents level, from where it launched several attempts to get back into the 61-68 cents trading range, but so far it has failed to close above resistance. Despite some wild intraday swings December has settled the last five sessions in a very tight range of just 56 points, between 60.44 and 61.00 cents.
In the absence of much other news, the market was mainly trading weather forecasts this week. Crops in the Mid-South and Southeast are now mostly open and therefore vulnerable to adverse weather, although it would probably not affect the size of the crop by much at this point, but might impact quality and lead to harvest delays.
Last weekend the forecast called for tropical moisture to stream from the Gulf of Mexico into parts of the Southeast and dump several inches of rain. The market traded slightly higher at the beginning of the week in reaction to this possibility, but when the system moved further west and missed most cotton fields, sellers seemed to regain the upper hand.
Weather fears rekindled today, when it became known that newly formed Hurricane Joaquin, a powerful category 3 storm, would track north from the Bahamas and might douse heavy rain on cotton crops from eastern Georgia to the Carolinas. There is still a lot of uncertainty in regards to the path and intensity of this system, but at this point we don’t expect it to have too much of an impact on the market.
The latest USDA estimate showed the US Southeast at 4.2 million bales, with Georgia’s 2.2 million bales accounting for more than half of that. At the moment it doesn’t look like Georgia is going to get much rain from Joaquin, while the Carolinas, which produce just a little over 1.1 million bales, could see some heavy downpours. However, in the context of a 14-million bale US crop it probably won’t matter that much.
The rest of the cotton belt, from the Mid-South to California, is still enjoying relatively good conditions that should allow harvest to gain momentum over the next week or two. The 10-day forecast doesn’t show much precipitation in these areas and the window for adverse weather to mess with crops is therefore slowly but surely closing.
As the US crop is starting to move in, we need to once again pay close attention to the AWP (Adjusted World Price). This is the price at which cotton can be redeemed from the US government loan. Currently the AWP for the coming week is at 44.32 cents, which means that a US grower who puts his cotton into the loan at 52.00 cents, can reclaim it from the government by paying just 44.32 cents. Another alternative is for the grower to forego the loan option and instead taking a loan deficiency payment of 7.68 cents (= loan of 52.00 cents minus AWP of 44.32 cents). This system was designed too keep US cotton competitive with foreign growths and prevent it from accumulating in the loan. Due to the fact that foreign basis levels have been under so much pressure lately, the AWP is calculating at a much steeper discount to the futures market than last year.
On the corresponding Thursday a year ago, on October 2nd, 2014, the December contract had closed at 61.85 cents, while the AWP calculated at 49.27 cents. Now we have the December contract at 60.60 cents, but the AWP sits at a much lower 44.32 cents. In other words, the spread between futures and the AWP is currently 370 points wider than last season.
This richer “POP” payment should assist the US in marketing its cotton, although at this point it remains still relatively expensive compared to foreign growths. However, once the crop is moving in and recaps start hitting the market, US offers should become more competitive. Unfortunately an even bigger POP payment wouldn’t do most growers any good, since many of them are going to max out against their payment limitations, if they haven’t already!
US export sales for the week ending on September 24 were slightly higher than in the prior week, as 122’700 running bales of Upland and Pima were sold to 18 different markets, with Turkey and Vietnam leading the list. Shipments remained slow at 76’700 running bales. For the season we now have total commitments of 3.3 million statistical bales, of which 0.9 million have so far been exported.
So where do we go from here? The market has been forming a temporary bottom near 60 cents and is trying to claw its way back into the old 61-68 cents trading range, but has so far failed on several attempts.
The CFTC report confirmed that specs added new shorts during last week’s break, while the trade was covering shorts and added new longs. If the market were able to close above resistance and push towards 62 cents, it would likely trigger some spec buy stops that could propel the market another cent or two higher. However, if that were to happen, the trade would emerge as a strong seller and cap the rally.
Conversely, if the market fails to take out resistance anytime soon, we may see a retest of the 59.70 low in December and if that level were to give in, the next stop would be 58.00 cents. A lot will depend on the weather over the next few weeks and how aggressive the US will become in marketing its cotton. We still see weaker prices ahead and would therefore sell rallies!
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