The 1965 hit lyrics, “Catch Us if You Can,” came to pass this week as the speculative funds caught the merchants and trade flat-footed and refused to let them out of the market until they had extracted a bucket of blood. That is, the speculative funds caught up with the mills trading philosophy and simply ran over them.
The trade did regroup after two bloody days and amassed the power to withstand another charge as the old crop July went through some 800 points in a week’s time. It is very tempting to say it’s over, and it probably is, but don’t bet more than a plugged nickel on it. Mill on-call sales on the July contract are still about 10 to 1 versus on-call purchases and there are now only some 25 days (June 25) to offset all the mill short positions on the July contract.
As stated last week mills are allowed to roll those positions forward. Thus, the equivalent of some 4,000,000 bales must be bought (priced) on the July contract in the coming 25 days. Surely the cotton trade is now prepared for such action and will defend the market in the low 80s to high 70s. The new crop December advanced to 75.06, only a token gain on the old crop fireworks and backed off to 73 cents at week’s end. Still, the December contract should be well defended at 71-72 cents for another month if not two. World supplies are tight enough such that the 2017 crop progress must be well determined before the assumption of an ‘average” or better can pull the December price lower.
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Rumors have swirled the past two weeks of U.S. export sales cancellation. This week’s report, while indicating positive sales, included cancellations of 61,600 bales of Upland, mostly attributed to India and China. Net sales for 2016-17 included 120,700 RB of Upland and 6,500 RB of Pima. Sales of Upland for the 2017-18 marketing season were 165,100 RB and 5,400 RB of Pima. Sales for 2017-18 appeared mostly on-call sales but, do not add to the old crop July on-call sales dilemma. However, the old crop sales, coupled with the price squeeze, suggests export cancellations will exceed 100,000 bales next week. Yet, should cancellations exceed that level, then these recent sales could also be in jeopardy of cancellation as July approaches.
Certainly, this week’s blow off top in cotton prices has rationed the available U.S. cotton supplies and U.S. exports will likely fall below the USDA estimate of 14.5 million bales. While the new crop has found strong export demand, the old crop cancellations will somewhat haunt the 2017-18 export market as those bales will compete with the new crop in the export market. That is, the available export supply will now include an inventory of old crop that had not been expected just a month ago. That is, the 2017-18 inventory of U.S. cotton, as perceived by the market, has just increased—another bearish concern for new crop prices. Nevertheless, as previously stated, current supplies are tight enough to support new crop prices above 71 cents.
China has been an active buyer of U.S. cotton for delivery during the 2017-18 marketing season, suggesting that Chinese imports will continue stronger than most predicted. This on-going trend is now a pattern as Chinese mill use will remain at current to higher levels and more cotton must be imported as the country continues its long term plan to reduce cotton production. Thus, some country must increase its production. The highly developed production and export system in the U.S. will prove to be a major benefactor of this and U.S. acreage will see major gains. The proven U.S. export system, coupled with the fact that U.S. seed companies have developed seed varieties with ever increasing yields and quality characteristics has more than complemented the value the other major resources used to produce cotton. U.S. 2017 plantings will likely exceed USDA’s estimate of 12.2 million acres and will continue to increase out to at least 2020.
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