By Dr. O.A. Cleveland
Textile mills chipped away at their on-call sales this week, disposing of nearly 50% of them. However, most of the trading was not outright selling, but spread trading (buying the March contract and selling the May contract).
Thus, the trading range continues, and the nearby March contract – now less than a week before first notice day – appears to be easing lower as suggested by last week’s key price reversal signal. Price slippage has been slow, and that trend will continue at least until the March contract enters its delivery period next week.
The May contract becomes the nearby on February 22, and the same 72.50-78.50 cent trading range should easily hold for another month or more. As in recent weeks, most of the trading will center around 74 to 76 cents, with price probes both below and above that area. The bias will be to probe lower due to the very large level of certificated stocks – more than 300,000 bales – that have come to the market.
Exports continue to reflect excellent demand for U.S. cotton. World market basis levels continue to show that world textile mills want U.S. MOT (Eastern, Mid-South and Texas) cotton compared to most other types, given the basis differences.
Mills are simply prolonging their price fixing decision that must be made by early June. Too, as noted in prior comments, mills will actually have to go through that dental office again – the one without Novocaine – in mid-April (based on the May contract) and then again in mid-June (based on the July contract) before they will finally fix the price they pay for cotton…cotton that has already been spun into yarn.
That is, the analogy used in prior weeks held true. Mills simply continue to kick the can down the road. They have emerged as huge price risk takers this year in record volume, and have paid dearly for the poor advice they followed in delaying the pricing decision. Sadly, they will pay more.
March on-calls sales were down this week for the first time in some five months. However, the decline in March was just little more than the increase noted for the May and July combined – another indication of kicking the can.
U.S. export sales reached a net of 234,900 RB, 222,200 in Upland and 12,700 in Pima. An additional 123,300 RB for delivery in 2017-18 sales were also recorded, bringing all sales for the week to 358,200 RB, another very impressive week of cotton export sales. Weekly shipments climbed to 363,300 RB, still on pace to exceed the current USDA estimate for 2016-17 of only 12.7 million bales.
I remain firm in my resolve that growers should price at least 50% of their anticipated 2017 crop at the current 74 cent-plus level currently being traded on the December 2017 ICE contract. The National Cotton Council planting intentions survey reported 11.0 million acres would be planted, based on conditions as of mid-December 2016 to mid-January 2017. Cotton prices posted significant gains since that period. However, I am of the opinion that U.S. growers may well plant 11.4 million acres as price prospects in the near-to-intermediate term should hold near the mid-70s.
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