2017-05-17 / Farm & Ranch


Sell-offs send futures prices lower

May 11, 2017

Cotton futures prices spent most of this week in a steady decline. Since last Thursday’s (May 4) close at 78.91, July futures fell as much as 2.74 cents to mark a low for this week at 76.17. December futures fell nearly the same amount, off 2.65 cents at this Thursday’s low of 72.15 which was the lowest price traded since Feb. 2. For the most part, this week’s sell-off has been attributed to speculators exiting their long futures positions, and the total number of open contracts in the market seems to confirm that theory. Cotton futures open interest (i.e. the total number of open contracts) declined 8,988 contracts to 254,040, down 3.4 percent as prices fell, signaling that aggressive selling of long positions was to blame.

Why were speculative buyers spooked? On one hand, there has been plenty of macroeconomic uncertainty to rattle financial markets recently. Jitters about Chinese economic performance and changing financial regulations led to price declines in several commodities where China is the largest buyer. The French presidential election also cast doubt on the future of the Euro, keeping international traders nervous about the currency markets. The U.S. has also had its fair share of the headlines, but concerns over rising interest rates seem to be re-surfacing.

In addition to the many macroeconomic risks scaring the markets, traders’ expectations regarding this week’s World Agricultural Supply and Demand Estimates ( WASDE) were more than enough to push the market lower. Focus has been on the likelihood of a large crop in the 2017- 18 marketing year and this month’s report gave traders USDA’s first projections for both the U. S. and World balance sheets in the year ahead.

The WASDE did not disappoint large crop expectations for 2017-18, especially not for U.S. production which it forecasted at 19.2 million bales of Upland and Pima combined. Most analysts were already expecting a larger than usual crop, but 19.2 million was at the top end of any public estimates. The exceptionally large figure assumes exceptionally low abandonment of just 7.1 percent for the country as a whole despite the fact that abandonment has averaged 16 percent during the past five years. Nevertheless, very little of the Cotton Belt currently has any kind of drought, reflecting the good moisture profile just ahead of planting. For instance, less than 9 percent of Texas, which represents 57 percent of expected plantings, had any dryness or drought according to last week’s drought monitor. Citing good moisture, USDA felt obliged to deviate from average yield and abandonment.

While the 2017-18 crop was the main point of focus, the WASDE report had something for bullish traders, too. U.S. exports for 2016-17 were revised up 500,000 bales to 14.5 million, tightening U. S. ending stocks and nearly making up for the larger 2017-18 production estimate. U.S. ending stocks are now projected at just 3.2 million bales for the marketing year ending July 31 which is exceptionally low. Next year’s U.S. exports are projected to hit 14.0 million bales which also help mitigate the large crop forecast. All in all, the report painted a picture of strong demand on healthy world economic growth.

Thursday morning’s Export Sales Report successfully turned the market’s attention back from future possibilities of large crops to the exceptional demand in the present. U.S. shippers exceeded expectations again by committing another 160,600 upland bales for shipment in this marketing year and 146,400 running bales for shipment in 2017- 18. Despite having just been revised higher, U.S. export commitments are already at 99.6 percent of the May forecast for 2016- 17 indicating export demand has been phenomenal.

After the release of the U.S. Export Sales Report on Thursday morning, July prices began to climb. A few spurts of large buying volume turned into a steady stream of buyers, and the July contract traded 43,603 times, rapidly erasing the entire week’s losses. Despite touching a low of 76.17 cents in early trading, July rallied all the way through the close, settling at 79.18, just three points below the high of 79.21 and up 30 points from last week.

While July’s rally was strong, December failed to hold onto its gains. December futures settled at 72.53, down 2.22 from last week. The divergence highlights traders’ conflicted views, pitting the current shortage against prospective surplus. With USDA starting projections from such a low level of abandonment, all market participants will be closely watching the weather and Monday’s Crop Progress Report. The U.S. production estimate has more room to fall than to rise, providing a potential source of energy for new crop “weather rallies.”

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