Cleveland on Cotton: ‘All appears to be bullish…and therein lies the problem.’

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Cotton bulls are roaming the globe as Chinese, Indian and U.S. cotton stocks continue to decline.  With stocks falling in the 3 major producing countries, world stocks are working their way down to 87 million bales, some 1.2 million below the current USDA estimate.  

Too, with the USDA world stocks estimate some 7 million bales overstated, prices were initially slow to move higher until the past month when virtually every analyst and the principal cotton agencies in other world producing countries began to challenge the USDA estimates.

Most calculate the USDA estimate is about 7 million bales or more too high. Most feel that USDA has errors in its China and India databases. As commented last week the market’s bullishness is thought to be based on the fact that world stocks are well less than that estimated by USDA. Additionally, production difficulties, particularly in the U.S. and China are in the headlines.

This energized the massive Chinese speculative funds and drove the market to new highs. Yet, as most of the world’s high grades are already committed, and the once thought to be excess supply of low grades are rapidly disappearing at truly “cheap” prices, the shortage in world stocks is only further fueling the Chinese speculative interest.

The old crop July has crossed the 89 cent barrier and still has an eye on 90 cents. Too, the new crop December has been very persistent in inching its way to 90 cents as we suggested 6 weeks ago. However, the very mention of 90 cents demands the notation that growers should be well on their way to fixing the price on as much as 50% of their expected 2018 crop production. Prices are now in the upper 10% of the historical price range and grower fixations are essential.

All appears to be bullish…and therein lies the problem.

The bull’s sentiment is becoming too strong and if the Chinese investment dries up then the market is doomed for at least a 5 cent pullback, if not more. Thus, the hope of 90 cents-plus now hinges on the Chinese speculator and Mother Nature’s continuing blessing of the Southwestern U.S. crop. Plant, but also Price!

The bulls are also supported by the ever increasing open interest that has kept the technical indicators of the market very excited. Too, the new found Chinese demand and the realization that the Chinese Strategic Reserve auctions, after being only some 50% subscribed for a couple of months are now fully subscribed as sales have reached to maximum 30,000 ton limit every day. This only opens the door for more U.S. cotton to be sold into the Chinese market. Thus, traders sense manna from heaven as both the fundamental and technical market factors are all pointing to higher and higher prices.

However, the bullishness, in my opinion, has about run its course.  There is room to the topside as December is within the reach of 90 cents. Nevertheless, as stated, it is time to have at least 50% of the 2018 crop hedged. West Texas has received beneficial rain, but the extreme drought will resurface without continued showers.

Weekly export sales were a net 50,700 RB of Upland and 1,200 RB of Pima. Upland sales of 152,200 RB of Upland were sold for the 2018-19 marketing year. Price as well as the limited availability of high quality grades are rationing export sales. However, weekly export shipments continue to hold well above pace needed to push 2017-18 exports above 16 million bales and reach our estimate of 16.6 million, some 1.1 million above the current USDA estimate.  

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Some have suggested that the unusually strong level of Indian cotton sold for export is limiting the volume of U.S. sales. However, most of the Indian exports are now of very poor quality and are simply being sold at near record discount levels. Of course, the U.S. low quality has moved almost as well as the Indian cotton as both are significantly discounted. However, the Indian price is more competitive than the U.S. price.

The merchants and cooperatives of both countries do not want to carry any cotton to the next year. The inverted market does little more than lock in a loss for the merchants and cooperatives. Thus, the necessity to sell at any price. U.S. shipments totaled 421,000 bales on the week as 403,000 bales of Upland were shipped along with 18,000 bales of Pima.

Mill on-call sales fixations are increasing as mills face higher and higher prices. Yet, there are some 4.6 million bales that still must be fixed by the third week in June. It should be noted that mills have already begun fixations on 2019 on-call sales. This position suggests that mills expect the current market strength will hold in the 2018-19 marketing season. Fundamentals also suggest cotton supplies will be even tighter in 2019 than in 2018.

Hold on for higher prices, but the new highs we expected have now arrived. Do not get caught without as much as 50% of your new crop priced.

Feed a bullish market, sell into it!!

Twitter: @OAcotton

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