It’s not over.
The old crop May and July futures contracts will continue to have bullish activity at least through early June. The market will come under pressure if speculators instigate short covering selloffs, but the low 90s should prevent any activity below 90-91 cents – at least through the expiration of the May contract and into early June for the July contract. The only other bearish activity facing old crop will continue to be weak fundamental demand.
The new crop December, after trading above our magic 85 cents, did back off as expected and ended the week fighting to hold 83 cents. The higher old crop prices trade into the May planting period, the more pressure there will be on the new crop December futures contract. Yet, the 82-cent level should hold until more is known about 2024 crop planting conditions and planting intentions.
The month-long February price rally saw May futures climb almost 14 cents higher. The rally began with USDA’s February supply demand report as traders realized that USDA’s estimate of the 2023 crop was grossly overestimated. This allowed traders to place their bets on USDA significantly overestimating the amount of U.S. cotton available to the market. Consequently, this led May futures to reach the magic dollar level with some 36 more trading sessions before the July contract becomes the lead contract month.
With demand already very weak, at best, the current rally has all but cut off the demand for U.S. cotton. Last week’s export sales fell to a net of only 40,000 bales. While some 17 countries were in the market – seemingly a respectable number – the realization that only three countries purchased a net of more than 3,000 bales highlighted the severe weakness in the export market. It is noted that Brazilian recaps did draw the attention of mills.
Yet, mills have backed themselves into a corner in that as prices have moved higher and higher, they realized that they must chase the market no matter how unaffordable prices may become. As the market backs and fills into the mid- to high-90s, look for mills to fix prices, in turn supporting the bullish side of the price equation.
At the beginning of the week, mills needed to fix the price of some 5 million bales on either the May or July contracts. That is, mills must buy futures contracts to cover roughly 5 million bales at whatever the futures price is. Granted, growers still need to fix the price of 831,000 bales by selling futures contracts, but the need to buy contracts is very sizeable. The ratio of buying futures contracts to selling contracts is 6 to 1. Thus, there are relatively few sellers left in the market.
With just two active old crop contracts remaining (May and July), the mid-90 cent price level is very well supported. Thus, speculators and mills are all but the only market participants left (while there are few sellers left to provide the sell side for a buyer, spread trading and option trading will provide the market with the necessary needed liquidity). Too, speculators have been so active in this rally that they are responsible for open interest climbing to a three year high (open interest should be viewed as the value of capital invested in the market).
Market dynamics have worked to place speculators and mills both looking to buy futures – a very unusual market phenomenon. Technically, the market will play out before $1.10 cents, but demand says prices have seen their high. New crop should fight and struggle to hit 85 cents again. Thus, as commented last week, growers should act to fix new crop prices at the 85-cent area, just two cents above the West Texas 83-cent insurance price.
Yet, never give up on cotton. Give a gift of cotton today.
Dr. O.A. Cleveland is professor emeritus, Agricultural Economics at Mississippi State University.
Source: cottongrower.com