Thompson on Cotton: Market Fundamentals Retake Control

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Just as the prior week’s market was heavily influenced by outside factors and posted significant losses, this past week supply and demand fundamentals were the driving force and prices rebounded as a result. Welcome to the volatility of commodity trading. Surprisingly, cotton broke rank with the grains as December futures closed the week at 87.18 only 210 points shy of the contract high on February 25.

It appears another run at 88 cents is in the making. Of some concern, is a lack of speculative trading as daily volumes have failed to exceed 16,000 contracts in each of the past seven trading sessions. We would be more confident in the success of a breakout if these gains came from heavy trading.

In the meantime, managed funds are cautiously holding onto their rather small long position. What we now need is a trigger of some sort to get them off the sidelines.

This could very well come Wednesday when USDA releases its Planted Acres report. It is safe to say this figure will fall below March’s planting intentions of 12.1 million acres. Industry predictions run the gamut from 10 million to 11.7 million acres. Herein lies our fear.

When opinions vary this widely, its easy for market expectations to go unfulfilled resulting in a market selloff, albeit temporary. Keep in mind that planted acres do not equate to harvestable acres as the latter is likely to be even smaller when accounting for possible abandonment.

In addition, yield potential, always a moving target, will have as much or more to say about final production.

Last week’s export sales were neutral to slightly bearish. Despite lackluster current crop sales, new crop sales were much higher at 149,000 bales. When combined, these sales surpassed that of the previous week by seven percent. Disappointing were shipments which slipped to 221,000 bales and now must average 268,000 bales a week for the remainder of the marketing year to meet export estimate.

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On the supply side, the U.S. crop is improving. To our good fortune, Tropical Storm Claudette showed some mercy sparing the midsouth and delivering welcomed rains to the southeast. The latest crop conditions report rates 52 percent of the crop as good to excellent versus 45 percent the previous week. Only six percent is rated poor to very poor compared to nine percent the prior week.

On the economic front, the Fed in their comments concerning interest rates were less hawkish this week calming inflation concerns and leading to a decline in the dollar. Overall, U.S. consumer spending was unchanged in May compared to April.

This pause by consumers was more a result of product scarcity and continued supply chain restraints. Then again, U.S. apparel sales were the strongest of any product group increasing three percent from April and over 200 percent from a year ago. As the chart shows, the U.S. apparel market has once again exceeded that of China giving further credence to increasing global consumption.

Where to from here? Wednesday’s planted acre projection and Thursday’s export sales numbers will be of utmost importance. Do not be alarmed if the market has a knee jerk reaction to numbers not meeting expectations.

In our favor is strengthening fundamentals as seen in the fact there may be as few as a half a million bales in inventory before new crop can get in the pipeline. This bodes well for prices and for a strong basis on early harvested, high-quality cotton.

Our bias is for December futures to exceed its February high. All the while, we are keeping a watchful eye on increasing Chinese cotton reserves which could enter the market, a possible resurgence of the dollar, and other unknown macro-economic news.

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