Cotton futures were unable to build on yesterday’s rally off fresh lows. More hard talk on trade from President Trump blew helped cotton back lower. US stocks continue to trade defensive as the US dollar index pushed towards recent highs. While cotton is only small collateral damage in the overall trade war, it remains hypersensitive to the situation. Both President Trump and members of his cabinet spoke on the issue in the context of the upcoming G-20 meeting in Argentina. Presidents Xi and Trump will meet over dinner on Saturday with the goal of hashing out the trade dispute. Whitehouse economic advisor Kudlow was optimistic about a deal, insisting China’s weak economy versus the US’s strong economy will expedite China to the table.
The December18 ICE #2 Cotton saw another 400 contracts/40,000 bales issued by Term Commodities (LDC/Allenberg), which were stopped by SG Americas (Glencore). That brings the total to 598 contract/59,800 bales over the first two days. Remaining open interest for Dec19 was 1,069 contracts/106,900 bales. Physical demand for US bales was reported as quiet by merchandisers, as was physical activity at the farm/gin level. Trading on The Seam was a modest 4,121 bales. Based on yesterday’s numbers, the US harvest is running behind pace by one to two weeks, with the weather affected heavyweights of Texas, Georgia and S. Carolina dragging the harvest out.
Although the USDA has already adjusted US production down 1.35 million bales in the wake of Hurricane Michael’s impact on Southeastern production it has yet the quantify losses in Texas from cold wet weather over the last month. Of course, when talking across the trade one can get a range of estimates for the additional losses. With the current WASDE production of 18.41 mb, many are comfortable with a December number somewhere at 18.0 mb or less.
The solid taker of the Dec18 contract and continued US export sales against current crop lead me to believe that demand is not quite as weak as those in the “trade” might bemoan. Certainly there are inventory issues in the textile pipeline and questions at the consumer level, but there is still a lot of demand on US books against a shrinking crop. System traders are said to be short cotton and much of the US crop has been priced to date. If true, we see less risk to the downside than the upside at current prices. Any relief in trade tensions between the world’s largest exporter and the world’s largest importer of cotton could have very drastic consequences for the US #2 Cotton contract.
On the daily chart, cotton never traded unchanged today, paring yesterday’s gains by roughly half. Yesterday’s bullish-engulfing pattern on the candlesticks was the second consecutive reversal over the previous four sessions. The market is trying to find support, but has yet to retest the early October low at 76.50