The cotton market had better than a decent week, gaining 224 points while trading a range that was nearly all northward of last week’s 61.61 finish. This week’s rally seemed to be fueled by considerable short covering as the market breached key resistance levels, but the Dec contract finished admirably today, picking up 41 points on slow US export sales and shipments.
An approximate 100 point increase in various average futures price metrics resulted in total net export sales being reduced by nearly 70% vs the week ending Oct 1. Net sales for the week ending Oct 8 were discouraging, to say the least.
No customer was waiting in the wings with large business to be done as Mexico had been the previous week. On a more positive note, we did hear through the grapevine of increased sales being accomplished over the past week.
Cotton Yields And Cotton Quality – Coming Up Short?
With respect to the US production, this season harvest should have made significant strides this week outside of North Carolina, South Carolina and Virginia, although expected rain across wes Texas could slow the harvest in coming days. Field reports from the Midsouth and Alabama indicate that the USDA may yet reduce yield further as the season unfolds.
Cotton quality is off as well, with just below 58% of stocks classed thus far this season deliverable to the board. Historically, quality tends to slip as the harvest season progresses.
With the exception of West Africa, yield expectations across the world seem to be moving lower. Although USDA did make a significant cut to its world production estimate, its representatives in India and Pakistan have produced reports that were more pessimistic that the official USDA figures.
One can only assume that a reduction in cotton quality is likely to accompany yield reductions, especially within the Former Soviet Union, where this year’s growing season was plagued by drought. Further, in the Xinjiang region of China – the part of the nation that normally produces the highest quality lint – reports continue to pour in that this season’s quality, especially with respect to micronaire, is disappointing.
While production information continues to be market supportive (at the expense of producers), demand has held the bulk of the market’s attention. Continued weakness in the price of and fad fashion preference for manmade fibers are not helping our cause. We call upon our industry-supported marketing firms to come up with fresh ideas to once again make wearing cotton en vogue.
Cotton Marketing Approaches Next Week
For next week the standard week technical analysis for and money flow into the Dec contract remain bearish; however the market has worked off much of its recent oversold condition. Unfortunately, as the Dec 15 contract enters its swan song sustained rallies are unlikely. Index funds will begin scheduled liquidation late this month while producers will likely add to the mix by selling any decent rally.
There simply is not sufficient time for specs to build any type of structured long position. However, as the mix of participant increases late in a contract’s life, volatility often increases, which does provide opportunity for quick (and often sharp) market spikes that can be sold.
Given this, it will pay for producers to work closely with their gin and local buyer to be in position to sell any decent rally or basis tightening. Particularly for producers who have base or premium micronaire, it may make more sense to sell smaller recaps early instead of waiting to sell larger consolidated recaps.
Louis W Rose IV, PhD has worked with cotton as a producer, consultant, analyst and trader. Rose holds degrees in Education, Agriculture, Plant Science and Business (MBA) from AR St Univ, OK St Univ and the Univ of Memphis, respectively. He has held positions with Aon Reinsurance and Cargill Cotton. Rose currently provides analytic services for various clients and media outlets and is the co-founder of Risk Analytics, LLC, producers of The Rose Report, which he authors. For more info on The Rose Report or analytic services, please visit: www.rosecottonreport.com
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