Cleveland on Cotton: Speculative Profit Taking Clears the Way for Push Higher

    Cotton harvest. ©Debra L Ferguson

    The cotton market had another positive week as life of contract highs were established in all contract months. Most notably the nearby March contract traded to 124.78 cents while the new crop December pressed the dollar mark with its high of 99.22 cents. The highs pushed prices into the overbought territory.

    Prices faded going into the weekend as speculative profit taking spelled lower prices at the end of the week as the March contract settled at 120.75 cents and the December contract settled at 98.75 cents. Much of the selling occurred during the last two hours of the week’s trading, suggesting speculators took profits prior to the weekend.

    The market continues to find excellent speculative buying based on technical and fundamental indicators. The market fundamentals allow for higher prices; thus, the least hint of bullish indicators tend to urge more speculative into the market. Additionally, the selloff in the international equity markets this week freed up substantial funds that are flowing into cotton, wheat, and corn and will likely flow to the soybeans market as well.

    All agricultural markets should gain from the freeing up of equity market funds. The CRB index is a key market to watch as it is an excellent barometer of bullish sentiment in the agricultural markets. The impact of inflation has bitten the market…as inputs, specifically the energy inputs, surge higher, raw product prices must move higher.

    Cotton did take a complete halt at the major price resistance level. Thus, the March contract has cleared its throat and is ready to move higher, albeit there could be downside pressure to 117-119 cents before it charges back to the 125/130 cent range. The December contract also purged itself. It should find excellent support at 96 cents but is now prepared to rally back to the 104-cent level.

    U.S. export sales continue strong as shipments lag. Shipment levels have increased notably the past two weeks but are still only near the 200,000-bale weekly average. Shipments must average above 380,000 bless weekly for the remainder of the year to meet the USDA projection of 15.0 million bales. It is very-very difficult to expect this target to be reached.

    More on Cotton

    Nevertheless, while some cotton is moving from grower hands (which implies selling of futures contracts-hedging by merchants), the selling is dwarfed by the combination of price fixing by mills (buying) and speculative buying. Thus, the futures market is faced with more buyers than sellers, the exact indicator of higher prices.

    China continues as an excellent buyer of U.S. cotton. Too, Chinese mills inquire daily, particularly for immediate to near immediate shipment. Likely, the Chinese government is now buying additional supplies as the international stigma against any use of any Xinjiang cotton or any product from Xinjiang is very significant.

    Remember, the price of cotton in China is some 25-35 cents above the U.S. price. Therefore, U.S. cotton remains a bargain. Further, the Indian crop is no longer offered, making world supplies very tight.

    The price of competing crops is another factor that is boosting cotton prices. Wheat, corn, and soybeans, offer profitable alternatives to cotton. There is some concern that 2022 U.S. stocks of cotton will remain very tight even into calendar year 2023.

    As has been discussed almost every week this season the on-call sales position in the market remains a significant bullish indicator. This week’s report shows that on-call sales for March, May, July are 12,159,500 bales versus on-call purchases of 1,736,400 bales. This ratio is 7.0, indicating there seven times as much buying facing the market than there is selling.

    Textile mills are caught short and must buy futures. This fundamental alone will keep prices in the current range for another two to three months, in the absence of some black swan event.

    As stated last week, we are priced out of old crop and 40-50% priced on new crop. The new crop pricing was between 90 and 92.50 cents. The remaining 50-60 percent of unhedged new crop is gaining value and hopefully can be priced in the 98 cent and higher range. Growers should begin pricing at the the current level.

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