By Dr. O. A. Cleveland
The market offered cotton growers a bit of a second chance this week as the December contract jumped to near 75 cents on a move that actually began Thursday of the prior week in response to the million bale export sales week. Yet, by the time Wednesday evening trading began the rally was fading and eventually fell limit down. In fact, the market settled down for the week due to the Wednesday-Thursday market weakness. Nevertheless, December was able to close the week near the 70 cent level, settling at 69.12, but still down off some 150 points for the week.
The feature for the week was the market squeeze faced by short speculators and some cotton merchants that had to exit the July trading period before the daily price limits were removed. Their short covering took the July to near 90 cents, but again, all attributed to the squeeze on the July shorts and not long term cotton market fundamentals. By the end of the week, the synthetic value of the July contract was 65 cents…a market swing of some 25 cents in one week! Funds and money managers are focusing their attention (and money) on the December contract.
Weekly export sales did not match the prior weekΆs million bale level, but remained extremely strong as net Upland sales totaled 488,000 RB for the 2011-12 and 2012-13 seasons combined. Old crop year-to-date export commitments are now 118 percent of the USDA forecast for the year.
Typically they would be 109 percent at this point. Again, this appears to be another indicator that the market floor has been established, the recent very strong buying by international mills.
The drought continues in the Southwest, but again, not as severe as last year. Yet, the lack of subsoil moisture will take its toll on yield. However, the Indian crop has to date failed to receive the typical monsoonal moisture. The crop is getting some rainfall, but there is a mounting concern regarding that crop. Monsoonal rains have not run true to form and an increasing number of reports are forecasting less than average moisture. Nevertheless, there remains time for the crop to catch up should the rains come.
There is little reason for growers to price any 2012 crop cotton at this time despite the bearish fundamental outlook. However, any return to the 75 cent level should be viewed as an opportunity to establish a price floor on as much as an additional ten to twenty percent of the crop. With both Indian and Chinese price supports for grains and oilseeds advancing faster than those for cotton, the market will eventually include a premium to buy cotton acres for the 2013 crop.
After all the limit moves of the past week, both up and down, prices remain the five week trading range and will likely continue just so as the December contract attempts to jump above the 72-73 cent level. Likewise, the bears are attempting to push prices below the major support in the 64-65 cent range. Any movement above 73 cents will likely be followed by a sell off. However, the limited support in the 67 cent area should be strong enough to hold bearish selling. For now the six cent 67-73 cent trading range will be dominant.
Cleveland is a Professor Emeritus, Department of Agricultural Economics, Mississippi State University.
