By Dr. O. A. Cleveland
Cotton prices were under the influence of outside forces this week. A number of cotton-specific fundamentals surfaced during the week, but cotton was swamped by general economic news regarding the U.S., Asian and European economies. A number of analysts report the cotton news to be bearish, but in total, I have continued to view it as appositive for the market.
The bearish news centered around the FEDΆs announcement that they were considering slowing QE3 – the third round of pumping money (cash) into the U.S. economy. Additionally, the Chinese government decided that banks were lending too much and that credit had to slow. The Chinese system also allows large amounts of private lending (a highly developed system itself) and is attempting to slow that as well. This created a sell-off in the stock and bond markets, which led to a slam on commodity prices and a major devaluation of numerous currencies against the U.S. dollar – i.e., high prices in local country currency for cotton and other commodities.
Despite trading down to near 84 cents, the market should find support between the 82-84 cent range. The potential to again challenge the 89-90 cent level is viewed as very probable. Nevertheless, we could potentially see continued volatility given the level of funds moving around in the bond and stock markets, to say nothing of the commodity funds.
One major analytical group increased their forecast for cotton plantings to 10.4 million acres, up from 10.2 million earlier in the year. Since the market expectation most often voiced is 10.3 million acres, this announcement was viewed as market neutral.
Additionally, cotton exports were seasonally high. Chinese sales to mills this week were mostly comprised of imported good quality cotton. All imported cotton offered by the government was purchased, which opened the door for another 150,000-200,000 bales that can be imported duty free – a very positive development and very telling of the Chinese mills' need for quality cotton.
Additionally, December On Call sales remain twice as large as Call Purchases for the same month, which is somewhat unusual for this time of the season. The data suggests that growers and/or cooperatives were very active in price fixations last week, which is also very positive for further market advancement.
The Texas Plains reported a good number of excellent local showers, but large areas received only light insignificant showers, if any at all. The net effect was neutral, as likely there is still another 500,000 to 750,000 bale reduction from the current USDA forecast for production loss in the Southwest. Also, given the current pace of shipments, the USDA export estimate of 13.6 million bales may need to be raised 150,000 to 200,000 bales, as this weekΆs sell-off is expected to generate increased sales.
Cleveland is a Professor Emeritus, Department of Agricultural Economics, Mississippi State University.
