Cleveland on Cotton: Defensive Week; Weather is Now the Decisive Factor

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Cotton prices were on the defensive all week as the managed fund speculative long position reached a record high level the prior week, a technical indicator that has always been associated with price failure.

We got you that word last Sunday via Twitter and Facebook so most of you received the warning.  From its prior weekly high of 78.5 cents the market lost a full 800 points before holding on at week’s end. The market found support on the weekly close at the 70.50 cent level, a key point if prices are to hold above the 68 cent area.

The bullish fundamentals that helped lead prices higher remain in place, although somewhat muted. Likewise, the same few bearish factors remain in the news. Yet, the 70-78 cent trading range remains the major trading channel and continues to bracket trading.

The August USDA supply demand report and U.S. crop production report were released on Friday and were taken to be neutral to supportive. While USDA did increase its estimate of 2016 U.S. production and carryover, it also reported higher world consumption and lower world carryover.

U.S. PRODUCTION

USDA increased its estimate of the U.S. crop 100,000 bales, up to 15.9 and moved that 100,000 bale increase to carryover as it left exports – 11.5 million, and domestic use –  3.6 million, unchanged. Thus, the 2016-17 marketing year carryover is now estimated at 4.7 million bales. (After the report, USDA did have to adjust its 2015-16 exports 100,000 bales larger bringing the effective carryover back to 4.6 million bales.)

The slightly larger U.S. crop was based on the excellent crop progress made throughout the Midsouth. All of the Delta states’ crops yields were estimated to average above 1000 pounds per acre. The August survey was the first objective field survey of the year.

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Most feel the estimate is slightly high, pointing to the fact that it was based on conditions as of August 1, not current conditions. Yet, in total the NASS-USDA report should be viewed as excellent. Crop prospects in Texas remain fail, but as noted the crop, while experiencing generally excellent moisture finally, is expected to continue under stress.

WORLD PRODUCTION

USDA reduced its estimate of 2016 world production by 1 million bales, down to 101 million. Production estimates were reduced for China, India, Mexico and Argentina.

USDA also chose to finally begin adjusting its historical data base for stocks, but only slightly. They did however, reduce world beginning stocks 1 million bales. World consumption was estimated marginally lower, but still at 111 million bales.  World ending stocks were lowered 1.7 million bales to 89.6 million, actually a significant reduction in that they refused to make meaningful adjustments to the Indian stock situation.

Stocks outside of the United States and China are projected at 36% of total use, similar to the estimated 2015/16 ratio. Yet more importantly, stocks of machine picked high grades continue to decline based on the 2016-17 forecast.

ANOTHER OPPORTUNITY

The trading range should support another opportunity for growers to price at 75 cents. Too, weather events could take prices higher. However, higher prices are now dependent on weather. There has been significant shifting out of cotton to the acid based chemical fiber due to the recent rapid price surge.

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