The information contained herein is provided by Plains Cotton Cooperative Association (PCCA), a farmer-owned cotton marketing cooperative headquartered in Lubbock, Texas. It is for general informational purposes only and is obtained from sources believed to be reliable; however its accuracy and completeness is not guaranteed by PCCA, and PCCA offers no representations or warranties of any kind in providing this information. Nothing contained herein is intended, or should be construed, as advice or guidance for the marketing of cotton.

Volatility Rules Cotton Market

May 18, 2017

What a week for the cotton market! The rally that began Thursday, May 11, carried July futures to multi-year highs, touching 87.18 cents per pound on Monday morning. Not only did July futures make a life-of-contract high, Monday’s overall volume of 109,542 contracts was a new all-time high for cotton futures, beating records previously set in 2008 and 2010.

Nevertheless, prices began to fall by the middle of the session and have continued to steadily decline since then. July traded from a low of 79.15 cents last Friday to a high of 87.18 and back down to a low of 78.84 yesterday. December futures were unable to match July’s eight-cents-up-eight-cents-down action. December advanced just 265 points from Friday’s 72.50 low to Monday’s 75.15 high. However, new crop futures have held onto their gains more firmly, only falling back to 73.55 in Thursday’s trading. July settled at 79.24, up 6 points for the week, and December settled at 73.64, up 111 points since last Thursday.

What caused such a fierce rally? Going into last week, speculative traders had been selling the market down, partially in expectation that a looser balance sheet for 2017-18 would finally force speculative longs to scramble out of their positions. Macroeconomic jitters and political worries helped create a more bearish environment, too. However, both last week’s WASDE Report and Export Sales Report highlighted how little U.S. cotton could be left at the end of the season. When the expected declines did not materialize, despite USDA’s forecast for 19.2 million bales of production in 2017-18, it became clear that prices had become too cheap. Short covering and new buying flooded into the July futures market where there were too few willing sellers to keep the price in line. Only traders who had recently bought futures were able to sell which they began to do only after panic buying seemed to be exhausted.

Thursday’s Export Sales Report, which was based on business done in the week ended May 11, provided additional demand confirmation. Net new sales of 120,700 bales for 2016-17 shipment (i.e. before July 31) were much better than needed to hit USDA’s U.S. export forecast of 14.5 million bales. Another 165,100 bales of new sales were reported for 2017-18, too. U.S. export commitments usually reach around 110 percent of USDA’s projection by the end of the marketing year because there are many delayed shipments and “carryover” sales that simply shift into the next marketing year. However, this year’s export commitments are at 101.7 percent of USDA’s forecast, 2.5 percentage points ahead of the five-year average. At this point, only a steep decrease in demand and perhaps significant cancellations of unshipped sales could prevent U.S. exports from hitting USDA’s target.

On the supply side, expectations for the 2017-18 U.S. crop are slowly turning from mere hypotheticals into closely watched data. This week’s crop progress report showed, as of last Sunday, that 33 percent of U.S. cotton had been planted versus 38 percent by this time last year and a five-year average of 37 percent. Texas, at 24 percent, was 4 percentage points behind last year and 3 percentage points behind its five-year average, but Oklahoma was 15 percentage points ahead at 33 percent planted. Arkansas and Missouri were notably behind due to heavy storms last week as was California. Clearer weather is giving many Southwestern producers a chance to work this week, and the percent planted is expected to catch up.

The large difference between July and December futures price action reflects the ongoing conflict between excellent demand and expectations of tight ending stocks for 2016-17 and good prospects for a larger crop. For anyone still holding 2016-17 cotton, next Thursday’s Export Sales Report will provide key information about demand, and Friday’s Commitments of Traders Report will show how large traders are positioning themselves. For traders focused on new crop, weather and Monday’s Crop Progress Report will be central. Despite USDA’s low abandonment prediction, U.S. production is not yet in the clear, and we caution against taking the predicted 19.2 million bales for granted.

In the week ahead:

  • The Crop Progress Report will be released Monday at 3:00 p.m. CDT
  • The Export Sales Report will be released Thursday at 7:30 a.m. CDT
  • The CFTC Cotton On-Call Report will be released Thursday at 2:30 p.m. CDT
  • The CFTC’s Commitments-of-Traders Report will be released Friday at 2:30 p.m. CDT

Friday, May 12

The July futures contract spent much of the session locked at limit up on what traders suspected was a combination of speculative, trade and option-related buying. The buying pushed July through the key resistance level of 80.00 cents per pound, and the contract settled at 82.18, up 300 points. December traded in a 203-point range and settled at 73.72, up 119 points.

Monday, May 15

The speculative buying continued, and July again soared higher, at one point reaching the 400-point limit. Selling pressure moved the contract off its high, but it continued to trade on strong gains and settled at 85.32 cents, up 314 points. December also traded on strong gains the entire session and settled 134 points higher at 75.06 cents.

Tuesday, May 16

Cotton futures reversed course under selling pressure and moved lower throughout the session. July reached an intraday low of 81.32 cents and settled 400 points lower. December cotton traded mixed but mostly lower and settled at 74.34, down 72 points.

Wednesday, May 17

July cotton found strength early when buyers became more active, but the contract met resistance as sellers returned. The contract ended the session in the lower half of its trading range and settled 115 points lower at 80.17 cents. December traded in a 79-point range and settled at 74.46 cents, up 12 points.

Thursday, May 18

Nearby cotton futures started the session with modest gains before selling pressure returned. July cotton settled in the bottom half of its 179-point range at 79.24 cents, down 93 points. December also benefitted from early support before changing direction and settled 82 points lower at 73.64 cents.