It appears, at least for now, we have found a tourniquet to stop the market’s bleeding. Activity from the spec/fund community has slowed but not before a major shift in sentiment away from cotton. Latest reports show them 1.79 million bales net long cotton compared to last February when they were 12.30 million bales net long.
However, at present demand and the trade’s position have created a firm floor of support at 66 cents. As for fundamentals, the demand side still looks very positive. Old crop is all but gone with near term mill demand having to be supplied by new crop cotton. 2017/2018 U.S. weekly exports sales remain very strong. Thus far over 5 million bales of new crop has been committed to sales which doubles U.S. commitments at this same time last year.
China’s reserve auction continues to be successful with over 8.8 million bales bought to date while we still see them as buyers of U.S. cotton each week. Rumor is they may extend their auction past August 1 which long term is bullish as these massive stocks are further reduced.
The production side of the equation is where things are still unclear and has hindered any market advance back to the 70’s. The U.S crop despite improving over the past few weeks in many locations still should fall short of 19 million. In fact, West Texas will likely see a larger dryland abandonment that will offset, to some degree, their increase in acreage.
In addition, a late crop with limited root development will be very dependent on frequent rains and a late freeze. The South Texas harvest is now in full swing with outstanding yields being reported, but in fact over half this crop is already sold. So as one can see our final production number is still very unclear.
The ebb and flow of crop conditions over the next few months will certainly affect the market’s direction. Watch for USDA’s next supply/demand report due to be released on August 10. This is the first where field surveys are conducted to derive production estimates, thus usually more accurate.
All this said, fundamentally we remain optimistic another run to the low 70’s is very possible prior to harvest. Most thought last week’s near 200-point gain was setting the stage. Currently, with the market at 68.62 it is still poised to do so. The question becomes, how will the spec community answer. Any significant rally is going to require some buying of the market on their part. On the other hand, further selling by them could threaten current support.
Going forward, those with unsold contracts should seriously consider any further move toward 70 cents as an initial pricing opportunity. Those fortunate to have previously priced some in the 70’s have the luxury of watching this market.
Even so, one might consider lowering any earlier placed orders around 75 cents to something more potentially obtainable in the lower 70s, especially with time not on our side. For Choice and AQCA growers who are pricing outside the pool, we will maintain a close eye on factors which might influence the market and keep you advised.