2017-02-15 / Farm & Ranch


Cotton Futures Retreat from recent gains, spread trading begins to dominate

February 9, 2017

Cotton futures gave back much of last week’s gains in the first few days of the week. The March-delivery contract fell from a high of 76.47 cents per pound last Friday to a low of 75.05 on Tuesday. Despite an enormous volume of contracts traded and the release of USDA’s World Agricultural Supply and Demand Estimates (WASDE) report, March futures stayed within that range through Thursday and Friday as well.

Index funds were a major contributor to the heightened activity. These funds hold very large, passive long positions in a broad basket of commodity futures which they move from nearby futures contract to the next contract at pre- stated times. Currently, that means selling their March futures while simultaneously buying May. So far, the “ roll” or “switch” as traders call it has pressured March more than other contracts, and the premium for May futures over March has grown from 0.62 cents to as much as 1.23 cents in Thursday’s trading.

The growth of the Certificated Stock has been another pressure on March relative to May and July futures. Certificated stock, cotton prepared and examined for delivery against sold futures contracts, grew by 45,231 bales to 239,949, which is roughly enough to deliver against 2,399 contracts. Since delivery of cotton does not require buying back futures to close a position, the presence of a large certificated stock usually indicates there will be more sellers than buyers when nearby futures enter the delivery period. The holders of certificated stock will be reluctant to roll forward short hedges unless the premium of the next deliver month over the current contract completely covers their cost of carrying inventory forward.

Although mills’ price ideas haven’t fully followed the market higher, there is still healthy demand for U.S. cotton. Although sales were slower than they have been in six weeks, the latest export sales report from USDA for the week ended Feb. 2 beat expectations. Net new sales of upland cotton totaled 208,100 bales for delivery in the 2016- 17 marketing year and 46,000 for 2017-18. Turkey (45,500), Vietnam (42,200), Indonesia (38,400), Pakistan (15,400), and South Korea ( 14,100) were the largest buyers, but a dozen other countries also purchased U.S. cotton. Actual shipments against outstanding sales also reached a marketing year high as shippers were able to move 452,100 bales last week.

As far as the U.S. balance sheet goes, there were few surprises on today’s WASDE report. The forecast for U.S. exports was lifted 200,000 bales to 12.7 million, and January’s strong export sales were the central reason cited for change. The net effect was to bring U.S. ending stocks back down to 4.8 million bales from January’s 5.0 million. Outside the U.S., Bangladesh, Vietnam, and India all had consumption estimates revised higher. Pakistan’s crop was 200,000 bales lower and China’s production was 500,000 bales higher. The net effect of all changes was a decrease in world ending stocks from 90.65 million last month to 89.90 million. China will be holding 48.85 million bales or 54% of total ending stocks. The rest of the world’s ending stocks fell 1.25 million bales from 42.30 million to 41.05 million bales. In other words, the international market for cotton appears to have become a little tighter.

With the WASDE report behind the market, merchants now will be focused on working through the mills’ remaining on-call commitments for March. According to the Cotton On-Call report, mills fixed more than 381,000 bales of their March commitments, but still had 2.85 million to go at the end of last week. Mills also increased May and July commitments by more than 200,000 bales, each. Nevertheless, producer commitments to sell grew more than mill commitments to buy which edged net fixation commitments back toward normal, but only slightly.

Much of the cotton industry will be in Dallas this weekend for the National Cotton Council’s annual meeting. Aside from the many committees meeting to work on important issues, on Saturday morning the Council also will be releasing its Cotton Planting Intentions survey results. The report is the earliest survey (rather than a price-based analytical forecast) to give a glimpse into what crop mix cotton belt producers are considering. With grains having underperformed cotton for the past several months, there are broad expectations that cotton will have a significant planted acreage increase.

In the spot market, producers sold more than 28,000 bales on The Seam’s online trading platform in the week ended Feb. 9. Daily average prices received ranged from 69.66 to 71.36 cents per pound. Late Thursday, producers had approximately 27,000 bales of Texas, Oklahoma and Kansas cotton listed in The Seam’s firm offer program.

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