Cleveland on Cotton: Bull’s Attitude — ‘Sharpen Up the Horns, But Feed a Rising Market’

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The cotton market is demonstrating signs of life again, but will this time be the charm?

The market has charmed me all year, but has only delivered failure built on more failure. Obviously I have no towels to throw in, rather you would have thrown in one for me on numerous occasions over the past 10 months. My 70 cent promise came and went after only blowing its weak breath on the 69 cent mark.

After observing textile mills spin U.S. cotton in Vietnam the past 2 weeks it is now just as refreshing to see the spot March contract back above the major resistance of 64.50 cents. Yet, the question begs; will the weekly settlement above 64.50 cents be able to hold that level in next Monday’s trading.  I do not know. Yet, I do know the market has done yeoman’s work in even getting to that level.

Since I cannot deny such, I am admitting-upfront-that I am accused of being the eternal bull in the cotton ring. Too, I suppose my blood has flown freely there, but the ole horns are still here and are even beginning to grow a bit.

Here is why:

Despite the notion that ICAC is looking at China as a pit running over with bears and even USDA defending its low export number and suggesting even lower shipments, as well as a crop above 13 million bales; the U.S crop will be lower and improved U.S. exports will hone sharp points on the old bull’s horns.

Next week’s USDA December world supply demand estimate should be expected to see the U.S. crop estimate fall to 12.9 million bales or nearly 300,000 bales below the current estimate. Before all is said and done the crop could even fall to 12.8 million bales as it will be calendar year 2016 before we will know if the Southeast will be able to finish picking its water logged fields.

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Granted, the market never sells out. Price rationing assures that. However, the current USDA carryover estimate of U.S. cotton supplies is currently 3.1 million bales. Exports will likely increase to the point that ending stocks will be much closer to 2.5 million bales.   One can easily argue that an ending stocks level of 2.2-2.4 million bales represents a total “sellout.”  Thus, as the last seven months of the 2015-16 marketing year play out, one should expect to see U.S. carryover move lower and lower in the successive USDA monthly supply demand reports. The U.S. will come near to the actual “sell out” level.

The Texas ice and freeze was not as damaging as initially projected, but there has been additional yield loss there. Exports at 10 million bales may be the final outcome, given the small U.S. crop as well as the now reduced quality that is yet to be harvested. However, the U.S. continues to demonstrate it is the world’s primary supplier of high quality cotton and, in fact, its percentage share of the world’s quality is actually increasing. Thus, the U.S. share of the world trade in quality cotton will increase this season. This is being helped by the drought stricken Brazilian crop which is also a very late planted crop. Further, while the Australian moisture situation has improved, the 2015 crop is facing a lower yield due to significant moisture problems.

With virtually everyone lowering the estimate of world cotton consumption I may be on a bit of an island suggesting that exports could, and will improve.

Consumption is weak, but I cannot help but smile after seeing all the U. S. bales being opened in the Vietnam opening rooms. Not only does the U.S. hold the largest share of quality supplies available to the market, textile mills are very thinly covered, at best, for their needs during the first quarter of calendar year 2016. This is very unusual and amplifies the fact that mall buying over the past 18 months has become almost total hand to mouth. More importantly, they are effectively without any coverage for the remainder of the year. Thus, we are seeing a strong export market as the reality of limited quality sneaks it way in the market.

Thus, as the scramble for quality cotton continues, the March contract will likely ease higher, but specifically, the price of cotton paid by the mill will in fact increase. This will come from a combination of a much stronger basis on the March, May and July ICE contracts and/or higher futures prices/or a combination of both likely the latter due to the New York contract specification.

Yet, we must remember the backdrop for price activity for the New York ICE quotes are for base grade 41-4-34. Most mills are looking for 31-3-37s or better. (More complicated is the point that the A-Index quotations are for a 31-3-36.)   It must be noted that the heretofore perfect fiber quality of 41-4-34 (Strict low Middling 1-1/16 inch, 4 leaf color) is now considered a discount cotton in the international textile mill trade.  The standard international quotation typically given is for a Middling 1-1/8 inch, 3 leaf color. However, many of the mills, and in particularly those producing the high count yarns, are looking for cotton grading as Strict Middling (21) or Middling (31), 3 leaf, 1-5/16 inch.

Looking at the technical perspective the market is most likely in the early stage of an influx of bullish technical trading.

A very nice triangle is forming in the charts and it gives most every indication of being s symmetrical triangle. While triangles are typically predictive, a symmetrical triangle formation is very rare. I recall only three or four in my years of following cotton. Thus, when one appears traders jump on the market helping insure the very high level of predictability for a symmetrical triangle. With the breakout of the triangle to the topside the technical signal is very strong for higher prices. Anyway, why not be bullish. There is absolutely nothing to be bearish about. Folks say China is not importing any cotton; maybe not with bagging and ties around it, but they will import more than 13 million bale equivalents of 100% cotton yarn in 2016.

Sharpen up the horns, but feed a rising market.

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