2017-04-19 / Farm & Ranch


Nearby Futures Prices remain in tight range, USDA raises export estimate

April 13, 2017

May cotton futures ended last week with a sharp fall to 73.38 cents per pound which was its lowest price since January 24. Despite making a marginal new low at the open of Monday’s session, the nearby futures contract regained the previous few days’ losses to settle at 75.15. Despite large trading volumes and significant data releases, May-delivery cotton kept within a tight price range from 74.41 to 75.80. New crop futures largely followed the lead contract’s direction but with smaller movements. December made a low of 72.19 last Friday and a high of 73.70 on Tuesday.

Index fund position rolling provided the lion’s share of high trading volumes this week. Index funds hold large, passively long futures positions that they must move forward during pre-stated periods before each futures contractís expiration. The largest index funds performed their rolling operation this week, selling out of their long May futures positions and buying into July and December. Accordingly, the number of open contracts in May has fallen from 102,677 to 44,583, down 58,094 from last Thursday’s close while the number of positions in July has risen from 75,180 to 104,808 and positions in December rose from 79,740 to 85,035.

Although the last round of index fund rolling pressured March futures prices lower versus May, the same effect has not repeated with May futures prices versus July. The May/ July spread, which is calculated as the May price less the July price, has instead rallied from a low of -2.08 (May futures 2.08 cents below July futures) to a high of -0.85 (May futures 0.85 cents below July futures).

The rally in the relative price of May versus July reflects a changing balance in supply and demand. Export sales of U.S. cotton have beaten expectations for the past few months, and this week’s export sales report was no exception. Cotton shippers reported making net new sales of 307,200 upland bales for delivery in the 2016-17 marketing year and another 204,200 for the 2017-18 marketing year that begins Aug. 1.

USDA formally recognized the amazingly strong export sales pace Tuesday with the release of April’s World Agricultural Supply and Demand Estimates report. Although the report had many changes, including an increase of 250,000 bales in China’s production, the single largest revision was made in the U.S. The U.S. export estimate was increased 800,000 bales to 14.0 million statistical bales (1 statistical bale equals 480 lbs.), decreasing U.S. ending stocks to 3.7 million bales. The result is the first balance sheet of the year to predict a year-over-year decrease in U.S. ending stocks.

Steady increases in the size of the U.S. crop kept supply surging at the same pace as demand this year. While demand has remained and even seems to have increased, there is not much more supply coming before next harvest. Still, pricing focus soon will center on new crop. After all, July futures have just a few months left, and U.S. crop prospects are good. Rains over the past several days have alleviated much of the dryness that had begun to develop in West Texas, and there is more moisture in the forecast to provide good conditions for planting. Good subsoil moisture also is boosting confidence that any cotton that starts well will be able to withstand the above-average heat predicted for summer.

Two factors will continue to dominate traders’ attention for the next several weeks. The strength of current demand and the prospect of another sizable crop stand in opposition. As they have for the past several weeks, traders will continue to monitor export sales and U.S. crop weather trying to figure whether need will overwhelm availability or the other way around.

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