Cleveland on Cotton: Bullet Train Was Riding High This Week

Cotton seedlings. ©Debra L Ferguson Stock Photography

Cotton prices took a ride on the bullet train this week as new crop futures made life of contract highs in all active months. Granted, most are focused on the 2018 crop as would be expected. However, the 2019 December contract traded above 77 cents. Don’t you want just a 5% or 10% slice of that pie?  Think about it and then do it. 

The 2018 crop price ride is not done yet, but this may be time for a slight pause. Supply fundamentals are now bullish so the price equation includes both supply and demand factors working to drive prices higher. Don’t forget, however, that weather scares typically kill the crop a couple of times during the planting season. Yet, irrational exuberance has not yet come into play.

Excellent weather could still somewhat offset the current production difficulties facing both the U.S. Southwest crop and the Chinese crop. Even higher price highs should be made, so do not get bitten by the greed bug. Feed a bull market. It needs some hedging to remain active. December will battle to scale 83 cents, but when successful will find a path to 85 cents. The old crop July came within 50 points of its contract high and will make another run to crack the 88 cent barrier as it tries for 90 cents.

This week’s bullish support and its long established base of bullish on-call sales, increasing demand, mills requiring immediate delivery, and the extreme drought across one of the three world’s major production centers, West Texas and the entire Southwest. The bullishness provided by these factors had sent the December 2018 contract above 82 cents. Now comes word of significant storms and rain events in the Xinjiang region of China, another of the world’s three most important productions regions. Thus, the unexpected tightness of world cotton stocks comes to the forefront and cotton futures are staring 90 cents in the face. So much for the world glut.

While USDA has not bought into this limited carryover scenario, the price discovery mechanism, the cotton futures market, certainly has. Recall we have been sounding the alarm since December by suggesting that world stocks be viewed as less China and less India. The reasoning — Chinese stocks are not available to the free market and Indian stocks are significantly inflated in USDA statistics according cotton analysts, the Indian Cotton Association and the Indian government.   

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The weather difficulties in China occurred so late in the Chinese production season that replanting is not viable. Consequently, the Chinese futures market shot significantly higher reflecting the concern over supply. That resulted in the Chinese reserve sale jumping from daily sales of only 50-60% of the offerings to the current pace of 80-95% of the daily offerings. U.S. merchants have also indicated more inquiries for U.S. export sales.

U.S. shipments have surpassed those as of the same date as last season. However, the USDA export estimate is only 15.5 million bales, just 500,000 more than the prior season. With some 2.0 million bales of U.S. cotton backlogged, but cleared for export, it is easy to suggest that exports will climb to 16 million bales even if the expected shipment rate turns sour. However, our estimate stands firm at 16.6 million bales, or 1.1 million more than the current USDA forecast.

Weekly cotton sales totaled a net of 384,700 RB with 153,300 RB of old crop Upland sales. China and India were noted as buyers. Shipments were 434,400 RB, above the level needed to reach our estimate of 16.6 million bales.

The old crop July contract has just 24 more trading days before first notice day. Thus, mills have just 4 weeks to dig out from their on-call sales trap. They did somewhat reduce their dilemma this week as on-call sales on the July contract fell some 5,400 contracts. Nevertheless, they must fix the price of some 5 million bales in the next 24 days.  Certainly some of this will be offset in the options market, but conventional wisdom suggests on-call sales continue as a major bullish factor in the market.

Feed a bullish market, sell into it!!


Cotton—The Fiber of Choice


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