Cleveland on Cotton: 71 Cent Level Just Won’t Let Go

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Like a bulldog, it keeps holding on. While I remain friendly to the cotton market I have held to the idea that prices needed to break back down to the 67.50 cent level, basis March and search for more demand; indicating my skepticism of demand above the 71 cent level. Yet, the market will just not let go and settled the week at 71.90 cents. Possibly, the 70 cent level has become the new price support point.

Weekly export sales were above 200,000 bales and the market traded 71 cents-plus most of the week. Both the U.S. and world crops have likely grown in volume the past month and USDA will answer that Friday, December 9. World ending stocks will be little changed as I feel U.S. exports will be increased and consumption in Asia and the subcontinent could be slightly higher. Yet, it was pointed out this week that U.S. consumption could be tracking marginally lower, but there is likely insufficient data to make such a projection at this time. Thus, the December WASDE is expected to be mostly neutral to prices. However, mills continue to add to the volume of on call sales. Mills rolled fixations to March and this will keep a slight fire under the March contract. Thus, the trading range will continue with possible dips to near 69 cents and rallies up to near the 73 cent level, and slightly higher.

The December delivery period has been very smooth. The price squeeze did mature, but was limited and December gave growers the opportunity to price above 73 cents, basis futures. The March contract will need to trade to about 75 cents to offer growers a similar cash return given carrying charges. That opportunity may result, but I continue to fear demand all but disappears at that level and the market could face dangerous shifting to chemical fibers. Once lost, never regained. Yet, the March contract, and the other 2016-17 crop contracts could also see another squeeze; minor or major is totally unknown this early, much less even if the pieces of the puzzle for a squeeze will even be in place two months down the road.

Mill have dug their heels in and call sales on the March contract have soared to 42,429 contracts versus only 4,475 call purchases. (Call sales indicate the number of contracts that must be purchased by mills to fix the price paid for cotton. Call purchases typically indicate the number of contracts growers must sell to fix the selling price they receive for cotton.)  Thus, the ratio is nearly 10 to 1 and the need for buying futures dwarfs the need to sell.   First notice day for the March contract is February 22, leaving 53 more trading sessions for traders to set their respective prices. Of course that is a history away, but the call purchases are offering support to the market. Additionally, growers are well sold, a clear indication that the market will not see selling pressure from growers and grower cooperatives except on price rallies. Therefore mills are facing the potential of fixing prices in the face of a rising market.

Technical indicators support this fundamental view that the market will have significant difficulty in moving below 69 cents. Additionally, the same technicals indicate a significant band of resistance between 72.50 and 73.50 cents. Yet, the mills are still betting on the market falling below 69 cents. Yet, the great unknown, speculative funds, continue to pour into the long side of the market. It seems the only retreat by funds is offset by new long positions. Again, this is very supportive of prices.

More Cotton Commentary on AgFax

Net export sales for the week climbed to 207,200 RB (202,300 Upland and 4,900 Pima). The major buyers were Vietnam and China. While mills are facing potentially higher prices, they are getting a bargain on their U.S. purchases as U.S. quality is essentially the highest on record and basis levels, compared to other world growths, are not reflective of the quality differences. The reason is that the high quality U.S. crop must compete with all other world growths and when the U.S. has “only high quality” the competition is based on price, not quality. Nevertheless, the high quality U.S. crop is very favored in the world export market. This is another reason to expect USDA to increase its estimate of U.S. exports. The end of the marketing year may likely see U.S. exports soar as much as 500,000 bales more than the current USDA estimate.

Much of my concern of price difficulty in early 2017 is founded on the potential that 2017 U.S. planted acreage will soar to over 11.0 million acres. Too, world acreage will increase and 2017-18 world carryover will again increase after only two years of declines. Yet, for now the trading range will continue.

Next week’s report will be delayed until Sunday, December 11.

Follow me on Twitter: @OAcotton

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