By Dr. O. A. Cleveland

Professor Emeritus, Mississippi State University

Special for Bayer CropScience

Cotton prices gaped higher and had not looked back as the market went into its close. The price chart gap appeared after last WednesdayΆs daytime trading was limit up. The market has now reached its highest point since July 8. The technicals have returned to a decidedly bullish posture, but letΆs not expect much more thatna potential rally to the 116-118 cent area without more help from Mother Nature.

Mother Nature provided the incentive needed for the market to flip the price charts to an outright “buy” signal. The potential for significant weather reduced yields in Pakistan, China and additional problems in the U.S. provided the fodder for the bulls. Too, global inquiries for cotton were improved for the second consecutive week and most mills have reported a pick up in business, albeit slight.

Recall that U.S. stocks are extremely tight and the market continues to view the U.S. as the exporter of choice. Thus, any hint of reduced production still makes the New York ICE trading very nervous. The current harvest is both needed and required to replenish the stocks pipeline. Recall too, it has now just been slightly over a year since the Mother Nature gave us a reduced 2010 crop. Just like last year, this yearΆs troubles came with the market in the mid-to-high 90Άs and prices jumped well above a dollar.

USDA will released its U.S. crop and world supply and demand estimates in its September report Monday. The report can be viewed at http://www.usda.gov/oce/commodity/wasde/latest.pdf

USDA may well lower the world crop as much as one million bales, leave demand unchanged and lower world carryover stocks one million bales. Certainly, the market action this week has suggested that world production is declining.

While demand prospects are creeping along, the CFTC Cotton-On Call Report is beginning to reflect that, once again, mills are tending to delay fixing the price of cotton being purchased for use later in 2011 and into 2012. That is, the mills are continuing to bet on lower prices. Granted, the world does not have the big pent up demand it had last year, but demand still exists and it surfaced more and more as the price of cotton slipped to the 95-105 cent area.

Additionally, China has now formally begun its program of buying cotton for its national reserve. The offering price for local cotton is approximately $3,098 per metric ton, or about 140 to 141 cents per pound. This activity, along with weather concerns locally and those associated with Pakistan moved Chinese prices higher on the week.

The intermediate and longer term activity should become slightly more bullish. Yet, note that I said intermediate to longer term. Short term, there remains considerable resistance between 116 and 120 cents. It is far too early to take the market above that level without an immediate improvement in demand. Yet, the good news is that the 2012 crop is back above the dollar level and for the most part will hold the dollar mark and move higher.