By O.A. Cleveland, Consulting Economist, Cotton Experts
After an unprecedented ten-day drop, December cotton prices scratched out a higher close at week’s end. Lower prices had been expected, but only down to 67.00-67.50 cents in the near term.
The historic rule suggests a six-day drop is possible, but not the 10-day collapse the market suffered. More and more trading rules are changing. The December contract fell to 66.17 before finding enough support to fight for a higher close.
The 2-week fall did not appear to be supported by fundamentals, so where was the culprit?
- Plantings and even early crop development favor a big crop and lower prices, but production hot spots have been well recorded.
- Much of Texas needs moisture and the Midsouth needs a life guard.
- The West needs air conditioning, but that crop is not pollinating yet so potentially the heat will not be a significant issue.
- Parts of the Southeast will go under water over the weekend, but that crop could still rebound with record yields.
With July 4 still nearly two weeks away the Midsouth also has time to post a record yield. The same can be said for Texas and the potential million dollar rain that could hit in the next six days. Thus, Mother Nature will prove to be the major soothsayer as to whether December can be pulled back up to 73 cents or if prices will be pushed down to near 60 cents.
Fundamentals? Take a look at export sales! By all rights the market should have shot higher on the week. Net Upland sales on the week totaled a very strong 167,500 RB, with Vietnam (108,300 RB) and China (28,200 RB) being the leading buyers.
Pima sales totaled 9,500 RB. However, sales for 2017-18 delivery exploded to 475,300 RB, comprised of 426,800 RB of Upland and 48,500 RB of Pima. Thus, all sales on the week exceeded 600,000 bales and still the market fell by triple digits.
Again, fundamentals were not the culprit, although there are bearish fundamentals in the mix.
We tweeted a couple of weeks ago that the speculative funds were exiting the market and their withdrawal has continued. In fact, reports suggest that fund liquidation has been more aggressive than expected.
Therein lies the culprit. Funds have pulled out of cotton. They had a magnificent run and cotton was their star for much of the year, outperforming both grains and metals. The cotton market simply outperformed most other markets, boosted by the now-solved on-call sales dilemma, exceptionally strong U.S. export sales and ChinaΆs and IndiaΆs appetite for U.S. cotton.
Yet today, faced with minimal economic inflation and a larger world crop, fund managers have pulled their cash out of market, parked it liquid accounts and moved to the sidelines to wait for their next market play. Additionally, this week saw strong algorithmic trading that took prices lower.
The combined action by these two sets of traders totally knocked the breath out of the cotton market. Thus, the market is trying to adjust to the void of the needed speculative open interest.
Prices are consolidating and waiting for the next fundamental to provide leadership. Exports will continue to be a key, but again, Mother Nature will be the only game in town for the next 2- to 4-week span.
Export sales to China have been underestimated simply due to most not anticipating that China must have high quality cottons (U.S., Australian and Brazilian) to mix with their National Reserve Stocks that are now mostly mid to low grades.
U.S. export sales will continue to outperform most all prior years. We previously addressed the competitive price and quality advantage that 2017-18 marketing year export sales have enjoyed. Export sales for the 2017-18 marketing year are the second highest – at this time of year – of the past 30 years, outpaced only by the record established in 2011.
With the exception of India, most countries will purchase nearly as much cotton from the U.S, if not more, as they did during the 2016-17 marketing year.
Certainly, abandonment in the Southwest is always a major price factor. There are definite trouble spots, but it remains some 2 weeks too early to kill that crop and the market is telling us that. It is not unusual for the market to kill the crop a couple of times early in the growing season. So, we will revisit the Southwest and in particular District 1S before after the second week in July.
