ICE finally had an up to end the week, suggesting that the final leg of the downside move had ended and the three week downturn was basically over. I had expected that a 76 cent bottom would catch the tail end of the move, but the March contract, moving into its expiry settled the week at 75.72, a few ticks below our 76 cent bottom.
With March index rolls completed and the National Cotton Council’s recognition that the world cotton industry has questioned the USDA India database, the old crop market is now poised to reestablish its 76 cent base and pull the May and July contracts back to the upper 70s and low 80s.
Additionally, most traders understand that the new cottonseed program is a safety net program and will not work to interface with free market movement and trading activity, the market is free from a government fundamental that could hamper price movement to the upside.
Merchants are using every strategy to force carry in the market, but price activity appears stuck on spread trading with a narrow absolute price range as price consolidation is being reestablished in the 76 cent area, basis old crop and 74-76 cents, basis the new crop December. A little crow continues to find its way on my plate and likely the old crop market high is now in, but another run into the 80s cannot be discounted.
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Mills continued their very aggressive fixation pricing on the March contract and even increased their activity with both the May and July fixations as well. That, along with continued aggressive export sales worked to turn market activity away from bearish trading and back to the positive side. However, the market must sustain and even build on its recently renewed demand base.
The new seed varieties, coupled with grower desire to hold and maintain acreage, is directly dependent on building cotton demand. On-call sales for the May and July futures will again flex their muscles as March index futures rolls have been competed (sell March-buy May) and that selling is out of the market. The combined May-July on-call sales totaled 76,615 contracts versus on-call purchases of 6,229 contracts; more than a 12:1 ratio and still increasing.
Export demand drove the market as net export sales of Upland totaled 364,800 RB and Pima sales of 2,800 RB. Upland export sales for the 2018-19 marketing year totaled 131,000 RB with the primary buyer being China. Despite comments that China is slowing their buying, they show very active daily interest and have made sizeable purchases even this week. They will become more aggressive. Weekly shipments totaled 324,700 RB of Upland and 17,800 RB of Pima.
There is a near record backlog of cotton cleared for export, but the trucking backlog, mentioned for several weeks, continues to be a major problem. The record level of imports has trucking countries scrambling to load/unload consumer goods for U.S. entry and exports are lagging. Again, the booming U.S. economy is chocking the transportation system.
The Southwest drought can become disastrous. However, this is the droughty season. Often times the market kills off a crop two or three times before its ever up and growing. This is one of those times. Much of the more serious drought remains in Northern Rolling Plains and will need to double or more in size.
Granted for those growers facing a disastrous situation these words are hollow, but the market will tell us about the drought, not the map. The market is always right, it is folks like me that are wrong, not the market. Yet, I am liking the market’s personality again.
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