Cleveland on Cotton: A Boat Full of Growers, Mills and Speculative Managers

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Textile mills chipped away at their on-call sales this week, disposing of nearly 50% of them. However, most of the trading was not outright selling, but spread trading (buying the March contract and selling the May contract). Thus, the trading range continues and the nearby March contract, now less than a week before first notice day, appears to be easing lower as suggested by last week’s key price reversal signal.  

Price slippage has been slow and that trend will continue at least until the March contract enters its delivery period next week. The May contract becomes the nearby on Wednesday and the same 72.50-78.50 cent trading range should easily hold for another month or more. As in recent weeks, most of the trading will center around 74 to 76 cents with price probes both below and above that area. The bias will be to probe lower due to the very large level of certificated stocks that have come to the market, more than 300,000 bales.

Exports continue to reflect excellent demand for U.S. cotton. It seems it is being used for different things, fabrics being a common use. The Cotton spandex Fabric is becoming increasingly popular because it can be used to exercise and it breathes, providing great benefits. World market basis levels continue to show that world textile mills want U.S. MOT (Eastern, MidSouth and Texas) cotton compared to most other types given the basis differences.

Mill are simply prolonging their price fixing decision that must be made by early June. Too, as noted in prior comments, mills will actually have to go through that dental office again, the one without Novocain, in mid-April (based on the May contract) and then again in mid-June (based on the July contract), before they will finally fix the price they pay for cotton; cotton that has already been spun into yarn.  That is, the analogy used in prior week’s held true. Mills simply continue to kick the can down the road. They have emerged as huge price risk takers this year, in record volume, and have paid dearly for the poor advice they followed in delaying the pricing decision.  Sadly, they will pay more. March on-calls sales were down this week for the first time in some five months, 13 weeks. However, the decline in March was just little more than the increase noted for the May and July combined, another indication of kicking the can.

U.S. export sales reached a net of 234,900 RB, 222,200 in Upland and 12,700 in Pima. An additional 123,300 RB for delivery in 2017-18 sales were also recorded, bringing all sales for the week to 358,200 RB, another very impressive week of cotton export sales. Weekly shipments climbed to 363,300 RB, still on pace to exceed the current USDA estimate for 2016-17 of only 12.7 million bales.

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I remain firm in my resolve that growers should price at least 50% (fifty percent) of their anticipated 2017 crop at the current 74 cent plus level currently being traded on the December 2017 ICE contract. The National Cotton Council planting intentions survey reported 11.0 million acres would be planted. The survey was based on conditions as of mid-December 2016 to mid-January 2017. Cotton prices posted significant gains since that period.  However, I am of the opinion that U.S. growers may well plant 11.4 million acres as price prospects in the near to intermediate term should hold near the mid 70’s.

Growers, mills, and speculative fund managers are in the SAME BOAT.

Mills weigh down the back end of the boat, but are about to sink with heavy on-call sales. Speculative funds have come in at record levels and are getting bigger and bigger shovels to unload their profits. Growers, at the front end of the boat have been lifted sky high, being uplifted by the record mill shorts and the record fund longs have added petrol to the fire. Growers have the opportunity to profit with the funds or sink with the mills. I am very firm in my resolve that growers should price at least 50% (fifty percent) of the anticipated 2017 crop now with the December ICE contract above 74 cents.

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