After some two months of moving to the upside, cotton prices are now on the defense while attempting to hold the important 83-84 cent major support level. The next major support level would be 79 cents.
After suffering a 10 cent loss as speculative funds took profits and exited the market, fundamentals are now back in the picture. Yet, the tariff nervousness was a drag on the market, but no more so than the recent rains in Texas. It was not important exactly where and how much rain fell. The news of rain was just simply bearish as we had, for several months, written it would be bearish.
The tariff talk made speculators nervous. Again, it was not important to them that cotton fundamentals would insure that tariffs, should they mature, would not hinder cotton demand and could actually increase the overall cost of cotton movement. The funds had extremely large profits and opted to pocket them with a wave of selling pressure.
With its high close just above 92 cents and its highest trade almost 95 cents, December cotton futures are back to defending the mid-80s and attempting to keep its precipitous drop in check at the 83-84 cent territory. The pressure to force prices lower is limited, as the drought-stressed Texas and Southwest crop – coupled with excellent demand and declining world and U.S. carryover – does suggest the 83-84 cent level is a bit low for cotton prices. The market will likely move higher, but will struggle as the northern hemisphere crop is in the midst the production season, just as Australia is harvesting record yields in some locations.
Nevertheless, world carryover is expected to fall some 5 to 6 million bales during the 2018-19 marketing season. The new marketing year will begin on August 1, 2018. The production will likely see prices working the 82-87 cent range with regularity. World supplies are simply that tight.
USDA further soothed the bulls’ nerves a bit on the week as the annual June plantings reportsuggested 2018 U.S. cotton planting were 13.5 million acres. The market was trading on the expectation that U.S. cotton growers had planted 13.7 million acres. Some had even reported 14.1 million acres were planted. However, once the USDA report was released and traders realized that plantings totaled only 13.5 million acres, the market bolted to triple digit gains. Too, many had expected more plantings were in the Southeast and Mid-South, areas where yields would boost the U.S. 2018 production close to 19-20 million bales.
However, the plantings news showed not only fewer acres, but that the plantings in Texas were still very suspect with respect to abandonment and yield losses due to only limited subsoil moisture. Many areas of the Southwest that had received moisture received enough to get the crop started, but still remain very delinquent in subsoil measurement – a principal factor that will constrain yield, thus likely causing growers to harvest an average-to-below average crop.
Current conditions suggest a 2018 harvest between 17.5 and 18.5 million bales. A crop this small would likely see U.S. carryover fall to some 3 million bales during the 2018-19 marketing season. More importantly, it would argue for a price forecast within in the 10 cent range of 80 to 90 cents.
U.S. export sales continue to be very strong due to sales for the 2018-19 year. Sales for the current 2017-18 marketing season have all but disappeared with just four weeks remaining in the season. Export shipments have slightly waned as well, but remain on pace to reach 16.2-16.4 million bales – 200,000 to 400,000 bales greater than the current USDA estimate.
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Dr. O.A. Cleveland is professor emeritus, Agricultural Economics at Mississippi State University.
Source: Cotton Grower