After slipping to the technically important 65-66 cent major support level, cotton prices surged upward with triple digit gains in Thursday’s trading, climbing above 68 cents. The market gave back some of those gains in Friday’s trading and it will be important for the December ICE contract to hold the 68 cent level as that was the breakout point for the July/August run to 78 cents. While Friday’s activity backed off somewhat from that important level it remains well within striking distance. Too, the bulls did win the week after having their backs slammed against the wall.
Early in the week the market was overwhelmed with the technical call to drop down and test the all-important 65 cent area. That holding, and on the heels of a hurricane running through the U.S. Southeast, and coupled with the fourth consecutive week of outstanding export sales, the December contract again became the darling of the bulls and raced ahead 260 points on Thursday to close near its daily high of 68.33 cents.
Hurricane damage will likely prove to be minimal, although some individual crops could be ravaged. Generally, it is too late for the moisture to be of any benefit. The crop actually needs the remainder of the growing season to be sunny and dry to develop its maximum yield and maintain quality. Nevertheless, the hurricane path ran through the heart of the Southeastern crop, affecting all but the Tennessee Valley in northern Alabama. It was not a welcome storm, but again early estimates suggest minimal damage.
The market had become very oversold. Thus, the hurricane news and the weekly export report rocketed the market higher. Weekly export sales totaled 309,000 RB of Upland and 16,600 RB of Pima. That brought total sales for the past three weeks to some 860,000 bales. The inclusion of sales for the 2017-18 marketing year push the total to near 1.0 million bales. The fundamental news here, besides from a good demand base, is that the textile sector feels that 68-72 cents is a profitable area for them to commit to cotton purchases. Such a demand base suggests that mill margins are profitable even at 70-75 cent cotton, basis the December ICE contract. Remember that most of the current report weekly sales had been made when December was trading near the 71-72 cent level. The export sales report can be viewed at apps.fas.usda.gov/export-sales/cottfax.htm
Principal buyers during the week were Vietnam, Pakistan, China, Thailand and Bangladesh. Vietnam is expected to be the primary buyer in the U.S. market all year. Of note, however, is that China remains a good buyer. Most are expecting that China will buy no more than required by their WTO obligation, but recent changes in Chinese import rules will likely allow them to increase purchase. Again, you are cautioned that most analysts expect China to purchase no more than the minimum WTO requirement. Yet, the recent rule change suggests that Chinese total imports will increase during the 2016-17 marketing year. Total export sales to date are 1.3 million bales ahead of the pace of 2015-16 pace (3.3 million vs 2.2 million bales). Yet, the current USDA export estimate for 2016-17 is at 11.5 million bales, only 200,000 more than the 2015-16 actual shipment number. It is early in the season. Too, USDA is likely waiting for more confirmation of U.S. crop size before adjusting its export estimate higher.
The major world crops experienced excellent progress the past month. While the Chinese crop was estimated lower its difficulties were already well established in the market. The past two weeks retrenchment in New York was basically due to the improving crop in India and the U.S. The push above 72 cents, and up to 78 cents, was the work of the managed funds both in the New York and Beijing markets. Reports now confirm the major withdrawal of those funds. There are funds available for the market, but the present strength of the U.S. dollar and the general bearish attitude surrounding most commodities will keep that money at bay for now. Cotton mush live by its own fundamentals for now and likely well into the harvest season.
USDA enumerators are in the fields as this is written recording the data that will be used for USDA’s September crop production report. Mother Nature has blessed the U.S. crop. Look for an estimate near 16.3-16.4 million bales. Production that large, coupled with continued strong export sales will tend to push USDA’s export estimate 300,000-400,000 bales higher.
Export sales have continued to surprise the market and the U.S. has been the major beneficiary. Mill call sales are beginning an impressive build up on the December contract. December calls sales are typically overwhelmed by the same months call purchases, but this year it is the call sales that far outnumber the call purchases for the December contract. The meaning—there appears to be far more “built up” buying of futures than selling of futures that will have to be executed down. Look for this to continue. The 68 cent level is key if the December ICE contract is to maintain any attractiveness to the speculator. Cotton has shown evidence that the 68-72 cent trading range is an equilibrium level for prices. Expect this to prevail. Too, Chinese Reserve sales, after experiencing a slow two week period, appear to have gained most of its early momentum and sales have returned their more accustomed levels. These factors will continue to offer support for a 68 cent trading floor.
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