Dec cotton futures on the ICE gave up another 58 points on the week, finishing at 64.64 despite a Dec – Mar spread that was persistently inverted. Cotton’s lack of upward momentum was likely partially due to strength in US currency and weakness in the grains. And the grain markets are bearish. We had called both soybeans and wheat lower this week, but with each passing day, it looked like each market was due a bounce, but the overwhelming bearishness of the markets refused to relent.
Well, it certainly appears that the market is looking for something fresh to trade on. US acreage, weather conditions, crop conditions (as well as the same parameters globally) seem to be priced in to the market. Hence, fundamentally, aside from the potential development of a tropical storm off the coast of the Carolinas, things are less than “touch and go.”
But this is the status quo for July cotton trading. Technically, the market is teetering on the precipice. That is, lack of upward momentum and a spec net long position vulnerable to some liquidation could force ICE futures lower in search of significant fresh demand.
Regarding demand, although the USDA is less optimistic in July with respect to 2015/16 world use that it was in June, US export sales and shipments continue to be seasonally strong. Still, this and the news that China’s reserve sales continue at a dismal pace, are most likely also factored into current prices.
On the whole, the tug of war between producers longing for 70.00 and mills desiring 62.00 – 63.00 continues as the market is influenced by outside commodity markets and international macroeconomic and political events. Although an impending US interest rate hike is likely factored into the market price at this time, the Greek debt crisis (and its effect on the value of the Euro and, ultimately US currency) is likely less factored in.
And then there’s Iran. Basically, I agree with Secretary Kerry’s statements to congress that Iran “got what it wanted a long time ago” with respect to its ability to enrich uranium and manufacture plutonium, but news headlines featuring the words “nuclear” and “Iran” do not leave commodity investors with a “warm fuzzy”.
Forward contracting options for producers remained lukewarm this week. While we are seeing limited activity, producers are telling merchants that current prices are simply too cheap to commit prior to harvest. Our advice remains essentially the same: In the absence of major changes, we’d buy puts on any rallies to or through the 70 cent level, harvest for quality, and shop recaps for basis after harvest.
For next week, the standard weekly technical analysis remains somewhat friendly, although weekly money flow into Dec remains bearish. Fundamentally, US export data is likely to be supportive on next week’s report – perhaps even more so than was the data featured on this week’s report. However, for the producer’s sake, the market likely needs fresh positive fundamental information in order to hold the spec community’s interest.
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