Cotton prices jumped higher on each daily close and has now seen higher closes on 7 of the last 8 trading days. In between the market has seen excellent U.S. export sales including marketing year high established this week.
Mills reduced their on-call sales only marginally and the large speculative funds held firm with their long positions, and likely added to the already very high position totals. Some small speculative longs were thought to have taken profits and exited some of their positions, but the offsets were minimal. Thus, the mills remain in the market facing on-call sales versus on-call purchases ratio of some 9 to 1. This implies there is substantial price fixing necessary for textile mills to accomplish by buying cotton futures or rolling the necessary contracts to the May futures contracts. There will be some of both, but mills are facing a market that is presenting itself as more and more bullish each week.
The very narrow three cent trading range–72.50 cents to 75.50 cent–remains in play, but pressure is building for prices to move higher. As many may remember, I have felt the market would not be able to sustain a rally above 75.50 cents. Yet, with the market again near the top of that range, we await the results of the challenge.
Mills faced the same pressure as the December contract neared first notice day and I felt mills would take price fixing action to prevent having to pay higher prices. Yet, they dug their heels in and not only kept their on-call sales positions in the market (short the market) but, they added to those positions and pushed them to in record levels. That is, they continued to believe that prices would come down.
Remembering an old war time expression of my Vietnamese advisors, “Never happen, GI.” That expression will hold fast and true as the March contract now moves toward its first notice day, now less than a month away. There simply is too much price fixing that must be done in too short a time period for prices to move below the 72.50 level. Too, in reality any movement below 73.50 cents, even it occurs, will be short lived. Add to that dilemma is the fact than any return to 74 cents and below will bring about a flurry of new U.S. export sales.
More Cotton Commentary
We have previously discussed the near record level of very high quality cotton produced and the strong demand for this quality by mills. In fact, there has been a glut of high quality this year. However, because quality has been in such short supply for 4 years, mills have expanded their demand for the production. The market is rationing the quality through world cash basis adjustments instead of lower futures prices. This has made U.S. growths the darling of world trade.
The market may well see some slippage this week as all Chinese business shut down today for the week long celebration of the annual Spring Festival. Too, it should be expected that export sales this week will be limited because of the holiday festival. Thus, this could be a golden time for mills to take advantage of a slight price break. However, with a record level of price fixations that must the done, price fixing action will feed on itself to some degree and prevent much slippage in price.
Exports continue as the shining star in the market as U.S. weekly net sales exploded by some 480,000 RB on the week. Upland sales totaled 457,000 RB while Pima sales were 6,500 RB and Upland sales for 2017-18 were another 10,400 RB. An indication of the widespread demand was indicated by some 20 plus countries that made purchases. China was the lading buyer taking almost, 100,000 bales followed by Turkey, Pakistan, Indonesia and India. As notes last week, exports to India and Pakistan were another indicator of solid demand for U.S. growths. Export shipments continued to average more than needed to meet the current USDA projection as Upland shipments totaled 227,700 RB and Pima shipments were 13,700 RB. With 6.25 months left in the marketing year, export sales have climbed well above 10 million 480 pound bales and shipments are at 5 million 480 pound bales…and the heavy shipping season has yet to begin.
The new crop December contract continues to gain about 50 points for each 100 point advance in old crop March contract. For now that is a rather historical relationship, but December will soon begin to develop some trading action of its own as March approaches.
Good new on the demand side…Jon Bon Jovi introduced a new line of denim jeans this week. The jeans are made of U.S. cotton and the cut and sew operations is in California…
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