As crop conditions improve across the Cotton Belt, the market posted its third consecutive week of gains, something which defies conventional wisdom when considered together. The December contract advanced 182 points, but more significantly returned to the 70’s, closing Friday at 70.62, a level not seen since mid-June. Apparently, today’s market is more concerned with current tight supplies than the potential size of the crop that’s about to be harvested. The U.S. export sales numbers from last week reflect this supply squeeze. While new crop sales maintained a healthy pace, sizeable sale cancellations were reported for the first time this year, over 91,000 bales. Normally this would be viewed as bearish, but the market interpreted it as the inability of merchants to find cotton to fill orders rather than a sign of declining demand. Shipments came in at a robust 284,500 bales which puts us on pace with a week remaining in the marketing year to exceed the USDA estimate of 14.7 million bales by nearly a half a million bales. When this adjustment is made our beginning stocks, as we move into the 2017 crop, will be less than 3 million bales. Historically, anything below three million is seen as an empty pipeline. This bullish scenario should capture the market’s attention at least for the next few months until harvest begins in earnest.
It’s no secret the current crop has improved and gained in maturity over the past few weeks, after one of the shakiest starts in recent history. Even so, we still believe a 19 million bale crop will be very difficult to achieve. For starters, the abandonment in West Texas, now believed to be somewhere close to twenty percent, will offset their increase in planted acres. Therefore, even with above average yields it will not produce the size crop once estimated. Also, last year’s ideal harvest season will be difficult if not impossible to repeat, thus anticipate, some yield and quality loses as we proceed to get this late maturing crop out of the field. That said, look for U.S. production to fall somewhere between 18 and 18.5 million bales, where if demand remains strong, which all indications are it will, next year ending stocks could remain favorably low, below 4 million bales. Everyone is patiently waiting USDA’s August Supply/Demand report scheduled to be released Thursday, August 10th. This one is always highly anticipated, for its estimates are obtained through physical field surveys thought to be more accurate. It will also give us a glimpse into the world numbers where close attention should be given to India. An overzealous monsoon season has led to some flooding in major cotton producing regions which could seriously hinder production. In addition, market watchers still believe USDA previously overstated India’s beginning stocks which may, at some point, be adjusted downward as much as two to three million, some say.
Of course, a market commentary would not be complete without mention of the spec community. We all know the impact they have on the direction the market may take. Their liquidation of long positions has driven the market downward since June, only to find support in the mid 60’s as their selling subsided. As they straddle the fence awaiting further news on the size and condition of this crop, the market has traded in a very narrow range from 66 to 68 cents. This past week, spooked by either the short term supply squeeze or hints of production problems, the specs began to cover some short positions resulting in the return above 70 cents. Any significant move beyond the current level will require additional buying on their part. On the other hand, their shorting of the market could move prices in the opposite direction. Since technical data most often guides their actions, we can take some comfort in the fact current charts are taking on a bullish formation as moving averages begin to converge.
What lies ahead? The short supply of old crop cotton coupled with near term demand should keep prices north of 70 cents, at least until harvest. At that time, look for prices to be pressured to lower levels with cotton more readily available. Thus this return to the 70’s should be looked upon as another favorable pricing opportunity. Growers with previous unfilled orders in the mid 70’s may find it prudent to lower these to more obtainable levels as quite a bit of resistance can be expected at 72 cents. Finally, with yield potential better known this near harvest, those who contracted conservatively may consider booking a larger portion of your crop. Choice Cotton has contracts available with a strong basis and quality premiums. Call us if we can be of service.
Until next time
Source: http://s3.amazonaws.com/media.agricharts.com/sites/2235/Market%20Commentary%208-8-17.pdf
