The stage is being set for one heck of a play!!
Mother Nature came back into play and instead of boosting West Texas production with adequate moisture, she likely washed away some acreage and played havoc with plant growth, regrowth and in many fields brought about a delayed maturity schedule. This scenario, coupled with an expected early, cool and wet fall, has placed U.S. cotton production firmly in the category of ‘very questionable.”
Production/harvest problems in other major world production areas has only added to this. Thus, the New York futures December contract pushed above the 69 cent price resistance level a week to ten days earlier than had been expected and now threatens the next level of resistance, just below 71 cents. Look for that hurdle to be scaled as December attempts to stretch to the 73 cents before setting up shop and looking even higher. The availability of high quality cotton for September-December delivery is growing tighter by the day as mills scramble for cotton.
Going into next week’s August USDA world supply demand report, the U.S. crop is declining. Yet, as the lost acreage resulted from storms occurring literally on either side of August 1, it is unknown whether or not USDA will include the damage. Logically, one would think they would, but technically, they should not. So, the second guessing will continue as always, but with more than the usual questioning. The drought stricken areas of Texas were drenched with 3 to 6 inches of rain rather than the beneficial one to two inch rain that was needed. The plant shut down and began a several day hibernation in an attempt to restart a normal growth pattern. Plant growth has been delayed for one to two weeks and…cool wet growing conditions are getting closer and closer.
Despite the record yields many have enjoying in South Texas, the West Texas problems will probably doom U.S. production, setting it back to 18 million bales. Miracles of miracles and a warm, sunny and dry fall into November will allow the crop to get back on schedule, but as stated, “Miracles of Miracles. Either way, mills will be pressed to obtain cotton without paying up for it. The noose is tightening.
Adding to this misery, the Australian crop may be as much as 400,000 bales less than the current USDA projection. Thus, this significantly reduces the availability of high quality supplies needed to meet mills fourth quarter needs. That same fire of price greed that burned so many mills last year is burning closer and closer. Some have already lost more than 3 to 4 cents, even after staring at a market begging for price fixations. Mills have bet very heavily on lower prices, and just like last season, and added to on-call sales. While such appeared to be a logical pricing strategy two to three months ago, we have noted the past two weeks that the strategy had begun to limit’s the market ability to move lower. Yet, mills continued to add on-call sales as noted in the CFTC Commitment of Traders Report. Consequently, they will have to act with haste to not get caught in the same predicament as last year.
More on Cotton
U.S. exports finished the 2016-17 marketing season increasing the phenomenal pace that had been set in the first five months of the season. It had been noted back in December that the export pace was 14.7 million bales. By the time the bales are counted next week, marketing year 2016-17 export U.S. exports may have climbed as high as 15.2 million bales, or between 600,000 to 700,000 bales above USDA’s estimate of less than 30 days ago.
As has been pointed out several times – mills have expressed the need for “immediate delivery” as they were operating on a hand to mouth inventory basis and third quarter demand was bursting at the seams. Thus, the market run up this week was associated not only with the production problems in the U.S. and Australia, but also with the realization that U.S. carryover was slipping to some 2.7 million bales.
Mother Nature could still be adding to the bagging and ties required for the U.S. crop with an open fall, but the odds for such are shrinking. Harvest basis should continue to be very strong and now quality concerns will enter the picture. Mother Nature is on the verge of throwing a big price party, an event not even thought possible just 3 months ago. Don’t get greedy, be prudent, but this market may have some legs a few weeks from now. The August highs are in front of us. So are the October highs. So are the December highs. Give the market 25% of your crop at 70.50 cents, another of a quarter at 73 cents. The rest of mine are out of here at 75 cents.