This was a significant week, as the market continued to build on its price consolidation phase, cleansed itself of an overbought position, and then proceeded to settle higher – all as the December 2017 contract entered its expiry. The 70.50-71.00 cent level continues to offer major price support, with price resistance in the 75-76 cent area.
The export market – i.e., the demand side of the price equation – continues to draw most of the market’s attention. World trade is expanding slightly, and the U.S. share of world trade is inching back up to the 40% level. Total commitments of upland cotton at the end of the week were 35.4% larger than the same week in 2016. Additionally, they are well above the normal pace at 73% of the USDA projection, compared to the annual average of 60% for this date.
Granted, sales have been marginally slower in December than in earlier months this season. However, merchants and cooperatives have slowed their offering pace, because crop movement has been slower than typical this season due to weather problems, ginning backlog and warehouse backlog. Yet, U.S. styles remain the most competitive cotton in the world, and mills are actively searching, but have not been willing to bid as high as the New York ICE price has climbed.
Too, the abundance of low mic cotton is forcing sellers to make more discounts in order to move the cotton. Mills, recognizing the abundance of low mic cotton, have dug their heels in somewhat in an attempt to force merchants and cooperatives to lower the bids. Even at that, bids by the U.S. trade continue to be the most aggressive in the world, as it appears they are intent on not carrying over more than some 4.3 to 4.8 million bales. The current USDA carryover estimate for the U.S. is 6.1 million bales.
Weekly export sales were a net 186,600 RB of upland, while Pima sales were a negative of 12,300 RB (35,700 in new sales and 48,500 in cancellations). Yet, 2018-19 sales were very strong, as 50,400 RB of upland and 23,500 RB of Pima were reported. The sales were enough to post the export report on the positive side. But more importantly, shipments finally came into the picture. Weekly export shipments of upland totaled a market year high of 246,800 RB, and Pima shipments were 23,500 RB. Thus, the report was very well received by the market and helped carry prices higher.
We have written much about India for three months and Pakistan the past month. Thus, it should be noted that both India and Pakistan were buyers, and that buyers were widespread with 18 countries in the weekly mix.
We have obsessively discussed the mill On-Call Sales Report the past five months. Each month, that fundamental information adds to the focus of the bullishness behind the cotton market. This week’s report saw on-call sales rise from 14,495,800 bales. Granted, that is total on-call sales out to March 2020. However, the more important indicators are the March contract; 5,598,600 bales that must be fixed, basis March or rolled forward; 2,884,600 bales that must be fixed/rolled, basis May; and 2,964,700 bales that must be fixed (and cannot be rolled) on July. Thus, there are some 11.5 million bales of “futures buying” that must occur in the coming months.
Offsetting that are some 1,089,600 bales that must be sold on the March contract; 124,200 that must be sold on the May contract; and 218,200 bales that must be sold on the July contract. The point being is that there are some 11.5 million bales to buy and only 1.4 million bales to sell.
This data is very fluid and constantly changing, but mills have far more buying on the books than growers have selling. It is a bullish scenario, and on-call sales will probably increase. However, as growers begin to move cotton, then on-call purchases will also increase and tend to decrease the bullish effect of on-call sales. Nevertheless, it is a net bullish market fundamental.
Mills are slowing their demand at 75 cents basis, March, and the market is facing massive overhead resistance between 75 and 76 cents and more at 76 to 78 cents. For those not already priced at 75 cents, it could be time to take significant action.
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