Sales were decent at 118 krb, with China lead at 30 krb, and Pakistan at 20 krb. Exports were shy of mediocre at 211 krb, and new crop sales were 21 krb. Using just sales to determine a new target, a cut of 150 krb is justified. Using just exports, a cut of 200 krb is justified. Thus we will go with a new target of 9.3 Mb (480#), vs USDA at 9.5 Mb. This raises the carryout from 3.5 Mb to 3.7 Mb.
Since the period between Thanksgiving and Christmas, our market began wrestling with the prospect of destocking from China. That idea forced price down 12c, at the same time the dollar was dropping 6%. The Mar acreage report was a tad negative, and a string of sales and exports have been neutral to shy. A 10c rebound puts cotton only 2c from the Dec highs. This may be a fair price after all said and done about destocking and a lower $. One wild ride for traders, however.
Varner View
For old crop, our scatter indicates the price is about right, but only after a furious rally of a dime brought price back to reality. The issue now is that new crop is taking over price discovery a drip at a time, and therein lies the larger, more negative outlook. Without being too long-winded, our crop is between 14.25 to 15.5 Mb, and we are using 14.5 Mb now. Then there are exports, and if there is a yield recovery in the US, Pakistan, India, China, etc, next year, then US exports will struggle to match this year, even if crop size is larger. A crop of 14.5 Mb and exports of 9.3 Mb leaves a new crop carryout of 5.3 Mb. Ugly. The theoretical high/low for that carryout is 67/42, with an average of 54.5c. Dec today at 62.5c is thus 6c above the average, and about 4.5c below the high. But the cannonball point is Dec is 20c above a theoretical low.
Technicals
The main feature recently has been the 5.5-year high in open interest, and the makeup and liquidation thereof. OI has dropped from 223k to 189k yesterday. The index fund and swap positions are heavily net long, and specs have just moved over to the long side. Commercial accounts are very short, which means the trade has accepted most of the remainder of this years physical crop, and that crop is now hedged via short futures in July. As OI has been liquidating while price has been rising, this is seen as a very finite event. It is difficult to know exactly what level OI will bottom, but in the last two years OI has declined down to a low of 164k contracts, and a high of 186k contracts as notice approaches. Our guess is with only a day before notice, OI will level out near 180k.
