The declining health of the cotton bull continues to draw discussion, but symptoms are few as he made an impressive stand on the week. The new crop December contract established a new life of contract high on the week, 75.64 cents, and the old crop July all but kissed 80 cents and came within 47 points of a new contract high, trading up to 79.80 cents on Thursday.
Vigorous U.S. export sales, renewed concerns surrounding widespread environmental pollution from polyester, the later than normal arrival of Indian cotton, and the very significant imbalance in on call sales vs on call purchases remain behind the ability of the price of cotton to hold in the upper one-third of its historical price range.
It is noted that the new price high and renewed price advance was established after both ABC news and AP broke stories of polyester pollution. Yet, for the very short run the market will continue to focus on the fact that U.S. exports are essentially the only cotton available to the world market and the on-call sales dilemma that has textile mills caught in a record price squeeze.
The market should be expected to back and fill between 77.50 cents to the very low 80’s in old crop and 74.50 cents and possibly 76 cents in the December new crop contract. While the new crop December is being boosted by old crop fundamentals, once 2017 plantings are more prominent on the horizon, the price for December futures will come under pressure. That time horizon clock will likely begin a noticeable ticking by the end of March and rapidly accelerate before mid-June. That is a rather wide window of action. However, while the March 31 USDA plantings intentions report is expected to be very bearish for new crop prices, old crop prices will continue to offer support to new crop prices into the final on-call fixation deadline for the July contract in mid-June. Nevertheless, the cotton bull continues to ask to be fed, i.e., continues a bias for higher prices.
That being said, my recommendation to be all but fully priced on old crop still stands. New crop should be 50-75% priced with puts purchased on all of the remainder. We are essentially attempting to pick the top of the market now. Too, I know and understand it is extremely early for a grower to fix the price of such a large volume this early, but the market’s cyclical pattern of price activity and its historical nature of shifting is paramount in the decision. Market fundamentals have played their hand. Cyclical analysis holds the cards now.
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This week’s export sales report confirmed that U.S. export sales over the past four weeks climbed above two million bales, essentially representing a record movement of U.S. cotton into the world marketplace. The U.S. seed companies have excelled in delivering to the grower a seed that combines the best of both yield and quality. That combination cannot be overstated as it is at the very core of the increasing share of the world cotton trade that the U.S. is enjoying. Such success now only increases the need for more success as cotton continues to lose fiber market share to polyester and its aforementioned pollution problems. The research reports on that subject referred to the polyester pollution as finding “plastic” in the water.
China continues its robust appetite for U.S. cotton despite most analysts suggesting that China does not need to import cotton. As we have stated for some time Chinese Reserve stocks are facing quality problems which has caused sales to slow. Chinese mills are needing some three to five bales of high quality imported cotton to mix with everyone bale their Reserve stock in order to spin fine yarns. This will keep the Chinese in the market primarily for U.S., Australian and Brazilian imports. The U.S. remains at the forefront as the other growths are simply not available at present.
Mills did have a brief opportunity to rid themselves of some of their on-call sales on the week and did so. However, the overall ratio was little changed, falling from 15 to 1 to just over over 12 to 1. More importantly, new on-call sales volume was added to the July contract where the ratio now stands at nearly 16 to 1. Thus, there are 4,300,000 bales of cotton that much be “bought” (price fixed) on the July contract versus only 28,000 bales that must be “sold” (price fixed) on the same contract. This demonstrates the requirement to buy futures swamps the requirement to sell. While this very bullish position has nearly played out in terms of price advancement, it does emphasize the fact that downside price risk on the July contract is very limited.
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