Cotton prices took several sharp blows on the chin last week as the market made a mockery of my prior weekΆs comments. Last week I had commented that the 85 cent mark would likely be the new bottom of the range, but I did get another market education this week. Once again I have discovered that the market is far smarter than me…something that always occurs just when I think I have it all figured out.
Markets are geniuses. Like the current long over-extended and stubborn Indian monsoon, the market washed away all the gains and bullish activity that had been made the past month—and all in just a couple of days, really just one day. Nevertheless, the eight month, rather wide 10-12 cent trading range remains in place, albeit prices are back near the bottom of the range. Yet, the weekΆs poor performance did open the door for a possible fall of a couple of cents below the long term range.
The marketΆs dramatic move south was propelled by a combination of a number of factors including:
overextended speculative longs;
failure of an “expected” hurricane to damage the U.S. crop;
increase in certificated stocks;
and uncertainty of the U.S. government shutdown.
Yet, no single one of these factors was likely any more significance than another. The specs have, on a number of occasions, pulled the market higher, but they typically have pulled it to 88 cents and above before a collapse. This time the market failed at 87 cents. The potential for a hurricane was built into market prices and its failure to materialize the prior weekend did leave some of the weather longs hanging out to dry—pun intended. The government shutdown did and still continues to play a role. The temporary cancellation of timely and accurate information published daily/weekly/monthly by USDA allows for considerable uncertainty to creep into the market,and uncertainty leads to price instability.
Economists love to distinguish between risk and uncertainty. Risk can be somewhat protected while there is little, if anything, that can be done to remove uncertainty. Yet, we still write books on the subject. The time honored accuracy of USDA reports, love them or hate them, have become sacrosanct to market makers. While we make take pot shots at the reports, they are based on sound and solid methodology and are always viewed as correct unless changed by time. This factor becomes more and more important as time moves on and we are all left in the dark, but in any given week such is not the case. However, two weeks now into the shutdown and heading to three weeks, uncertainty is quickly becoming an issue. Certificated stocks are building, but are still only some 20,000 bales, without any delivers pending and with harvest progressing rapidly.
More to the point the market collapse was most likely associated with the balance between supply and demand and while supply is at a record level, the available supply restricts demand on a price move above 88 cents. It has and it will continue to do so. Yet, the bulls can still hang their hat on the increased problems facing both the Chinese and Indian crops, the worldΆs two largest producers. Too, the weather problems faced, and still facing the U.S. crop, the worldΆs largest exporter and most dependable supplier, are also adding to the bullΆs hope.
