Cleveland on Cotton: Expect Volatilty in the Coming Weeks

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After jumping higher on the heels of a bullish world supply demand report, the surge in cotton prices was halted at the important 72 cent price resistance level, basis December.  Mill interest also subsided somewhat at 70 cents, but not as much as expected.  Thus, mills will have to either raise their bidding level to the 69-71 cent level or ease off on cotton consumption as a number of events are in place to argue for higher prices.  Nevertheless, prices will remain under pressure as the Northern Hemisphere harvest continues to advance.  While both the U.S. and world crops are likely getting larger the speculative longs have continued to add to their already large position.  It is felt that those longs will roll out of their December positions in favor of the March contract beginning next week.  Yet, the price rebound resulting from the October supply demand report has likely set the 65-66 cent price floor.   

The longs that decide to remain in December may force a slight squeeze as certificated stocks are at the lowest level since February and only about 28,000 bales.  There will be an ample supply stocks eligible for certification, but the time required to obtain the stocks, move them to a delivery warehouse, and then have them certificated could overwhelm the system.  Certainly that is the case in the spring and early summer months when shipping schedules routinely overwhelm movement for certification.  Yet, harvest pressure can and does easily create the same concern.  Thus, the pressure of inbound stocks could force warehouse delays and prevent timely moving of stocks to deliverable warehouse locations and exacerbate a potential squeeze. .

Additionally, this dovetails with the very atypical large call sales position requiring price fixation on the December contract.  This action creates the need to buy futures to fix the mills price paid for cotton and will only add to the bullish idea of higher prices.

Weekly sales of U.S. cotton for the week ending 10/13/2016 totaled a net of 340,200 RB of Upland and a marketing year low of 5,100 RB of Pima.  Remember than the New York December ICE contract was mostly in the 67-69 cent range during the reporting week. Thus, export sales were expected to be strong.  Yet, the total sales were somewhat larger than expected.  Too, the report included essentially 200,000 bales of Upland sales to China (199,000).

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Weekly sales to China have been larger than most expected the entire year.  Too, recall we stated a month ago that sales were on tract to reach well above 14 million bales.  That pace continues, even though some were surprised that USDA increased its estimate by 500,000 bales in last week’s October supply demand report, up to 12.0 million bales.  Export sales are some 1.7 million bales more than at the same time year-ago.

Export shipments are about 800,000 bales ahead of the prior year’s pace. Nevertheless, I would be remiss if I suggested sales would actually total 14 million bales or more.  Yet, that is the current pace with just short of only 3 full months of the marketing season already in the books.  There will likely be room to expand U.S. exports up to 13.0 million bales if harvest conditions remain excellent and quality holds up to expectations.  Of course, and being redundant, a 13.0 million bales export mark would be 1.0 million bales above the current USDA forecast.  However, as noted both total sales and sales to China have far exceeded expectations. Another caveat; however, is that the New York nearby contract remain near the 70 cent level if sales are to expand above 13.0 million bales.  That is, mill signals are that some will substitute cheap acid based chemical fibers as cotton prices move above 70 cents.

Look for the market to remain volatile with just 4 plus weeks remaining until December’s first notice day (November 23).  Triple digit trading days should be routinely expected.  The full price range should not be discounted, 65 to 72- cents, but I expect to see the 67-70 cent area to be where most of the trading is focused.

Follow me on Twitter: @OAcotton

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