Howell: Cotton rally stalls after climbing to four-week high

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A climb to a new four-month high ran into profit-taking amid overbought vulnerability and disappointing export sales in U.S. cotton futures last week.

Spot March posted a 17-point loss for the week ended Thursday, closing at 63.77 cents. It jumped to 65.23 cents on Wednesday, highest since Aug. 21, fell to a five-session low at 63.58 cents on Thursday and finished back below its nine-day moving average.

December expired at 62.27 cents Tuesday, settling 217 points under March and leaving a continuation chart gap. The May delivery closed with a seven-point loss for the week at 64.55 cents, while December 2016 eked out a three-point gain to 65.23 cents.

Cash grower-to-business sales declined to 64,381 bales from the prior week’s 94,734 bales, the marketing year high. Prices rose to an average of 60.23 cents from 58.96 cents, reflecting premiums over loan repayment rates of 11.64 cents, up from 11.35 cents. Daily price averages ranged from 59.06 to 60.67 cents.

The market gyrated widely and finished with a modest gain at a new high close for the move on Wednesday, the day of USDA’s monthly supply-demand estimates.

U.S. estimates showed a 250,000-bale cut from a month ago to 13.03 million bales in production, a 200,000-bale reduction to 10 million in exports and a slight 100,000-bale downward revision to 3 million in ending stocks. The export cut was based on lower available supply and lagging sales to date, USDA said.

The domestic mill use estimate remained at 3.7 million bales for a total market offtake of 13.7 million bales, down 1.12 million bales from last season. Ending stocks are estimated at 21.9 percent of the offtake, down from 25 percent in 2014-15.

The crop cut — all in the upland forecast of 12.58 million bales — stemmed mainly from lower production in North and South Carolina. Pima prospects were unchanged at 451,000 bales. Estimated all-cotton yields fell 14 pounds to 768 pounds, 61 pounds below the five-year average.

By regions, upland production estimates declined 252,000 bales to 3.843 million in the Southeast and 18,000 bales to 2.052 million in the Mid-South, with small increases of 17,000 bales to 6.174 million in the Southwest and 3,000 bales to 511,000 in the West.

The estimates for Texas and Georgia, the top two cotton producing states, were unchanged at 5.8 million and 2.3 million bales, respectively.

Crop estimates also were unchanged for the Texas High and Rolling Plains at 4.03 million bales and 870,000 bales, respectively, which combined would account for 39 percent of the U.S. upland output.

The USDA’s projected range for the marketing year average price received by producers of 56 to 62 cents was narrowed a cent on each end, with the midpoint remaining at 59 cents, down from 61.30 cents in 2014-15.

Globally, USDA’s updated estimates lowered production by 1.92 million bales to 103.71 million, trimmed consumption by 200,000 bales to 111.39 million and reduced ending stocks by 1.7 million bales to 104.39 million.

Crop reductions for Pakistan, China, the United States, Turkey, Greece and Turkmenistan were partially offset by an increase for Australia. Mill use cuts for China, India and Pakistan were mostly offset by increases for Vietnam and Bangladesh.

Projected world trade rose by a million bales to 35.35 million. Import forecasts were increased for Pakistan, Vietnam and Bangladesh but lowered for China. Export increases for India, Brazil and Australia more than offset the U.S. reduction.

The world carryover is expected to decline 7.62 million bales from beginning stocks and account for 93.7 percent of consumption, down from 95.1 percent foreseen last month and the 2014-15 stocks-to-use ratio of 101.5 percent.

Outside China, production of 79.41 million bales is expected to exceed consumption of 78.89 million bales by only 520,000 bales, a sharp drawdown from last season’s surplus of 11.73 million bales.

On the nearby demand scene, U.S. all-cotton export sales for shipment this season fell to a six-week low of 85,500 running bales during the week ended Dec. 3, down from the marketing year high of 289,500 the prior week.

This brought 2015-16 commitments to 4.821 million RB, widening the gap behind year-ago bookings to 2.18 million RB or 31 percent. Commitments were nearly 50 percent of USDA’s December export forecast, compared with 64 percent of final exports a year ago.

The USDA forecast is for the lowest exports since 2000-01. Exports are expected to account for 73 percent of the total offtake of U.S. cotton, with domestic mill use making up the remainder.

All-cotton shipments increased to 115,300 RB from 90,800 RB the previous week, boosting exports for the season to 1.856 million RB. The lead over year-ago shipments narrowed to 99,400 RB. Shipments have reached 19 percent of the USDA estimate, compared with 16 percent of final exports at the corresponding point last season.

To achieve the USDA projection, shipments need to average roughly 230,700 RB a week, while weekly sales averaging approximately 143,500 RB would match the export forecast.

Sales for shipment next season of 44,000 RB, up from the prior week’s 2,600 RB, hiked 2016-17 commitments to 683,200 RB, up from forward bookings a year ago of 505,400 RB.

Meanwhile, trend-following funds boosted their net longs by an aggressive 18,250 lots to 39,666 in U.S. cotton futures-options combined during the week Dec. 1, according to government traders-commitments data.

Those were their largest buys since the week ended June 30. Index funds shaved their net longs by 450 lots to 63,454, while traders with non-reportable positions flipped to net long 1,826 lots from net short 800 lots, a reversal totaling 2,626 lots.

Commercials sold 20,426 lots to increase their net shorts to 104,945 lots, adding 20,013 shorts and liquidating 413 longs. They had been large buyers the previous week when March had fallen below 62 cents.

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