Don’t Hold On To Cotton Too Long

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The ICE March contract struggled over the course of the abbreviated trading week, failing to post a single positive daily gain over the period. March ultimately settled at 71.25 – a 107 point weekly setback. While this loss seems somewhat negligible, March traded nearly 200 points off last week's 72.32 settlement, but topped out at an intraweek high of only 72.70.

US net export sales for the week ending November 17 were deceptively strong at around a quarter million running bales – far ahead of the weekly pace required to meet the USDA's export target.

However, cancellations in excess of 80,000 running bales (more than 50% of which were attributable to Mexico) were nearly quarter of weekly gross sales.

An appreciable portion of the sales figures reported were very likely tied to deals made at this year's Sourcing Summit, but for which paper work had not been completed by November 14. And, the pace of shipments continues to be dismal.

Although the consensus seems to be that the US crop is getting larger, it is doubtful that total production will ultimately be realised any larger than the USDA's latest estimate of around 16.1 million bales.

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Most of this season's harvest is complete, with West Texas accounting for the lion's share of cotton still on the stalk. Looking ahead to the 2017 crop, some organisations are projecting a 5% increase in planted area within the US versus 2016.

Internationally, liquidity in Indian cash currency continues to hamper arrivals of this season's crop, but there is some evidence that the situation is mitigating somewhat.

In China, the NDRC has announced that reserve sales for 2017 will commence on March 6 – significantly earlier than expected – and run through August.

The final USDA WASDE report of the calendar year is slated for release on Friday, December 9, and early indications are pointing toward a bearish report. Cotton Outlook has, through combined adjustments to its 2015/16 and 2016/17 estimates and projections, added nearly 1.6 million bales to world aggregate ending stocks within its recently updated balance sheets compared to its October estimate. Given the pace of export shipments, it seems plausible that the USDA might reduce its 12 million bale export projection. At this time, market risk for the report seems to be skewed to the downside. Producers are seeing their third consecutive year of a strong spot basis extending well into or even beyond the harvest period.

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This has caused some producers to "grow horns", expecting the basis to remain strong and allow them to take advantage of upward market swings in the winter. Based purely on the past three seasons, this approach can't be easily discredited.

Many producers have done very well holding their crop until the end of the calendar year or into the first few months of the new year. But a longer perspective tells us producers shouldn't own cotton very far into the New Year.

Two major factors need to be considered by producers looking to hold crop.

1. First and foremost, storage isn't free. While storage will vary from region to region, it typically costs roughly a penny a month to store cotton, to say nothing of interest and opportunity cost.

You don't want to burn 5 cents worth of storage and interest to get a 3 cent gain in price.

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2. Second, US quality has been higher than normal across the cotton belt. Indeed, many merchants are complaining that there is so much long staple middling, they can't find base quality (SLM, 31-3-34) to fill their needs.

This means the quality premium normally seen in the winter may be considerably smaller than previous years. At the risk of sounding like a broken record, the safest and most consistent way to market successfully is to sell spot cotton on a strong basis and buy calls to carry into the spring. Other strategies may have greater potential, but that potential comes with substantial risk.
 

US net export sales for the week ending November 24 are likely to be disappointing. It looks like March cotton will have difficulty moving significantly higher ahead of the December WASDE report.   

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