By Dr. O. A. Cleveland

Professor Emeritus, Mississippi State University

For Bayer CropScience

The technicians have played the cotton market like an old fiddle to perfection. After falling 44 cents in a month, and breaking below the 107.00 cent support level at last week, the 99 cent mark was approached at the weekΆs close. Trading was limit down on the day as the weekly close was 99.46.

Two weeks ago I mentioned the 99.21 cent level as the 38.2 percent retracement from the 52-week low as the next level of support. That level has now been tagged. Thus, the next support lies at 93.50. That failing, the target then drops to 91.00 cents. The 52-week low, another 20 cents lower, is the final line of support – and that is all the way down to 71 cents. While it is a cinch that prices will not have to fight that battle, now is not time to bet against the technicals. We are likely bottom feeding, but do not bet against the short term trend line.

Last weekΆs price activity should be taken as the marketΆs formal announcement that U.S. supply/demand conditions are not of particular importance in the world cotton pricing scheme. The Texas crop, likely below 4.0 million bales, and very possibly below 3.0 million bales, has not had any bullish influence on the market. The devastation of the U.S. textile industry is well documented. (Some 10 to 12 years ago, U.S. domestic consumption began to disappear, falling from nearly 11 million bales then, to now between 3.5 and 4.0 million.) However, the thought that the crop disaster in Texas, with nearly 55 percent of total U.S. plantings, will cut the stateΆs production to at best only half of a normal crop, and the market still falls some 50 cents or more is totally unbelievable, except that it has happened! Again, U.S. cotton fundamentals can have little to no influence on the market.

That is not totally true, even though such an argument can be effectively made. The U.S. remains the worldΆs largest exporter of all cotton, and the worldΆs largest exporter of quality cotton. The loss of Texas production means the loss of quality cotton – where most of the U.S. high-quality cotton is grown. Too, it means that the inroads to global markets for quality cotton will be at risk, leading to a further reduction in exports.

Spot month trading was inactive across all regions last week. Weekly export sales were again a net negative, and that included both the 2010/11 and the 2011/12 marketing years, a real rarity. The market is demanding to see some signs of a pick up in demand from China before it will find true support. One hope is that the price either has or will soon generate stock rebuilding (buying) from China. They must ease into that slowly so as not to spook the market higher. They will likely use the price break to begin buying. Note the December 2013 futures contract is about 400 points higher than the December 2012. Cotton must continue to compete with grains and oilseeds. The long range technicals continue to favor higher prices for cotton. Thus, Chinese stock rebuilding must begin before the market returns to the bullish side. They will buy. Yet, the market will wait for it before it moves higher.