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.

Cotton Futures Remain in a Trading Range

March 23, 2017

Despite a sharp turn downward in Monday’s trading, cotton futures prices have remained firmly within the past two months’ trading range. Monday’s price action saw May-delivery prices fall from a high of 78.74 cents per pound to 77.30, but there was little follow through over the next few days. May futures declined further to 76.68 on heavy volume Tuesday but struggled to fall beyond 76.67 on Wednesday when prices eventually recouped some of the losses.

Thursday to Thursday, May futures lost 90 points to settle at 77.27 cents. Overall volume was slightly above last week, and the total number of open contracts had gained slightly as of Thursday’s close. December futures continued to gain new positions rapidly while the May-delivery market has seen open contracts drop.

Strong international demand for U.S. cotton continues to take center stage in the market. This week’s Export Sales Report, which covers activity for the week ended March 16, revealed that international shippers had made net new sales of 328,200 bales to be shipped in the current marketing year that ends July 31 and another 201,300 bales for shipment in the next marketing year. China, Vietnam, Turkey, and Indonesia were the largest buyers among 18 buying countries. The level of sales is far beyond the pace needed to hit USDA’s current U.S. export forecast at 13.2 million statistical (480lbs.) bales despite this month’s 500,000-bale upward revision. U.S. export commitments are approximately 97 percent of the current forecast versus a five-year average of 92 percent at this time in the marketing year.

Mills’ on-call purchase commitments, the cotton contracted by mills on which the price is not yet fixed, are still very high. Merchants buy futures as mills fix prices, and there were still approximately 33,000 futures to purchase in May and more than 43,000 in July. Although mills may roll forward some purchase commitments, they must complete most of them before the respective futures contracts enter their delivery periods. The mills’ need to fix such a large quantity has given speculators a lot of confidence that prices, if they do fall, will not fall sharply since there are many mill bids below the market.

Bearish arguments have centered on two key points. The first of these is the Chinese auction which some consider to have underperformed expectations. Although one must concede that auction activity has slowed, it is difficult to say the auction is failing. Expectations seem to have been set by last year’s auction which sold a high percentage of nearly everything offered after the first two weeks. However, last year’s auction started two months later in the year.

The quality of cotton offered in the auction also has been an issue of concern, and at least part of the declining offtake percentage is because undesirable lots are staying on the offer list. Still, the auction has already sold 1.72 million statistical bales in the first three weeks, leaving 23 weeks for the mills and traders to purchase the estimated 7.5 million bales of supply shortfall. It is also critical to recall that China’s domestic cotton market is isolated from world trade by high tariffs and other restrictions which call for discounting the domestic auction’s day-to-day importance for international cotton markets.

The second and more central bearish argument focuses on prospects for U.S. production in 2017-18. On March 31, USDA will release its Prospective Plantings Report which most analysts expect to show another increase in planted acreage versus the U.S. outlook figures and the National Cotton Council’s early Planting Intentions Survey. Bearish commentators have focused on the prospect of repeating this year’s excellent yield and low abandonment which could potentially loosen the 2017-18 balance sheet. However, we repeat our warning that planted and harvested acreage is not the same thing. A failure of dryland acreage in West Texas, heaven forbid, has the potential to swing the market from possible surplus to shortage. A continuation of demand at current levels could also do the trick.

In any case, U.S. cotton remains competitive versus international offers. Traders will continue to keep a tight watch on international demand for cotton, but crop weather is now taking center stage. USDA will release its Prospective Plantings Report next Friday, March 31, at 11:00 a.m. CDT and will give the analysts their first hard figure that USDA will use in future forecasts.

In the week ahead:

  • 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 Prospective Plantings Report will be released Friday at 11:00 a.m. CDT
  • The CFTC’s Commitments-of-Traders Report will be released Friday at 2:30 p.m. CDT

Friday, March 17

After trading on both sides of unchanged, cotton futures at the Intercontinental Exchange (ICE) settled with moderate gains as the marketing week began. May cotton traded up to 78.60 cents per pound on light buying and settled at 78.36 cents, up 19 points. December cotton traded on modest losses early in the session before moving to positive ground and settling 17 points higher at 75.63.

Monday, March 20

The ICE session began with contracts trading in a sideways pattern early; however, the May contract reached an intraday high of 78.74 cents before selling pressure increased. Nearby contracts fell hard, and May settled at 77.33, down 103 points. The December contract managed a four-point gain, settling at 75.67.

Tuesday, March 21

The weakness continued, and most contracts settled near the bottom of their ranges due to a lack of support. May cotton could only reach a high of 77.48 cents before settling at 76.84, down 49 points. December cotton opened lower and settled at 74.88, down 79 points.

Wednesday, March 22

Cotton futures reversed course, possibly on fixations and export buying. Trading started slowly and in narrow ranges. May cotton was on both sides of unchanged until light buying increased. The contract reached a high of 78.18 cents as its range increased and settled at 77.34, up 50 points. December cotton followed May but in a narrower range and settled 28 points higher at 75.16.

Thursday, March 23

Futures spent most of the session on positive ground before settling mixed. May cotton reached a high of 77.97 cents then struggled to find direction. The contract settled at 77.27, down 7 points. December cotton, on the other hand, settled 33 points higher at 75.49 cents per pound.