Never Give Up On Cotton.
It is fun to say it. Never Give Up On Cotton.
Time and time again, the darling of the commodity world finds a way to both surprise and survive. The current rally keeps the 15-month-old trading range in play at 76-88 cents. Yet, it is going to be tough as nails to break above the 88-89 cent mark. Too, it has likely elevated the bottom of the trading range up to 83 cents.
Yet, the market remains supply driven as demand continues as the single significant problem facing the market. Granted, the weekly export sales report, on its face, was massively bullish, but what was not reported was equally important as well. The rally is real, yet it remains supply driven, not demand driven. Thus, expect the rally to fail at the very top of the range – 88-89 cents. There is just too much resistance at the top.
However, if it can do 89 cents, then what is a penny more?
Yet, mills suggest the current rally has cut off all demand needs. That said, Never Give Up On Cotton. Speculators have single handily forced prices higher. Just know that if sell stops are hit, prices will fall like a rock back to 82-83 cents. Growers are advised to be heavy sellers, understanding that we are two weeks away from the March contract’s first notice day. Growers with high quality cotton will be able to cherry pick both when and at what price to sell.
The U.S. crop is likely some 300,000 bales or more smaller than the USDA estimate. Further, USDA protocol is such that it may well be April or even June before a new USDA estimate escapes from the Washington bottle, even after 2024 planting has begun. How the Department can be so late is anyone’s guess.
This, coupled with the fact that March first notice day is just two weeks away and that certificated stocks are all but nonexistent, is setting up a monster squeeze on the contract. Cotton must be found to satisfy the growing appetite of the speculative longs. All of this is becoming known just as the March contract enters its expiry position, placing unusual emphasis on not only just how small the 2023 crop was, but also on the limited availability of quality cotton – cotton that can be certificated and delivered against a futures market position.
This becomes noticeably clear when one notices that the December 2024 contract – the contract that represents the current price expectation of the 2024 crop – was down on the weekly close. That is, the price urgency is now and will disappear once March futures go first notice. The same urgency may likely arise again as either or both the May and July 2024 futures contract approach expiry.
The weekly export sales report was positive. However, recall that sellers have great leeway as to when sales can be reported and how changes can be made. At least two major merchants reported sales that were much older than the current reporting period. Again, that leeway does exist.
However, shipments were extraordinary – a marketing year high at 396,770 bales. But again, remember that some of those shipments occurred prior to the weekly reporting period. Nevertheless, the market was overly impressed that shipments were at a marketing year high. However, sales above 11,000 bales occurred to only six countries, so demand remains piecemeal.
Too, it is well documented that several Southeast Asian mills are having considerable difficulty in opening letters of credit. Additionally, Chinese factory activity was lower for the fourth consecutive month in January, as the country continues its economic struggles. Such economic difficulties continue to be major deterrents to all economies across Europe and in the U.S. as well.
The Fed admitted this week its mistake in suggesting lower interest rates last month, noting that inflation continues to be a major problem in the U.S. economy. Thus, world economic activity remains hamstrung and, along with that, world cotton demand struggles. Few, if any Asian mills are operating at full capacity, with most at 75% of capacity at best.
Nevertheless, speculators are ruling the market and will continue to be a force at least into the May contract and likely for the remainder of the marketing year. The market will challenge the price resistance at 88 cents with an outside objective up to 92 cents. In the absence of widespread demand, it is doubtful prices will stay around for the 90-cent ride.
But…
The On Call ratios have switched to the side of the bulls, suggesting that the 83-cent cotton will be cheap. This adds to the mills’ difficulty in pricing cotton. Some mills will be caught having to chase prices higher and adding to market volatility.
The 2024 new crop December contract balked at rising above 82 cents. That will likely be the high – 82-82 cents – going into the 2024 crop planting season. However, market dynamics continue to suggest the new crop will see the 90-cent mark during the marketing season.
Plant cotton.
Give a gift of cotton today.
Dr. O.A. Cleveland is professor emeritus, Agricultural Economics at Mississippi State University.
Source: cottongrower.com