Cotton prices moved higher on the week, reaching a six month high, as the March contract gave way to the May contract as the spot month. Attempting again to climb above 90 cents, the market, while remaining strong, again sent signals that the 87-90 cent level brought on more rationing from textile mills.
Via signals in export activity, the current rally has likely stalled at the 89 cent mark and will again test the mid-80s. The 90-92 cent target just seems too big of a bite for now.
Recall, the prior rally above 89 cents had only a brief life. This market likes the upside for now and likely will through its First Notice Day on the May contract. That said, the 90-93 cent hurdle will likely be too high to clear.
While export sales continued to sizzle, this week did mark the third consecutive week of lower sales.
Nevertheless, net sales of all cotton totaled almost 210,000 bales. These were comprised of 120,300 RB of Upland and 7,600 RB of Pima for current year delivery, and 81,900 RB for 2014/15 delivery. Sales have now reached 9.3 million bales well ahead of the pace need to reach the 10.5 million bale estimate of USDA. In fact, weekly sales from now until August 1, (25 more weeks) need only to average 50,000 bales to reach the USDA estimate of 10.5 million bales.
Most, including myself, believe USDA will need to increase its estimate some 300,000 bales, U.S. Export Sales For weekending 2/6/2014.
However, the reason for USDAΆs caution may lie within this weekΆs otherwise excellent sales report. The report did indicate that export cancellations did raise their ugly head again and to the tune of 65,100 bales from eleven countries.
Granted, ten of those countries accounted for only 12,200 bales, but Chinese cancellations accounted for the other 52,900 bales, a bit large for this time of the year. Additionally, it was reported that China sold some of its imported U.S. cotton for export (cotton bought at a lower price and sold for a good profit). Such action allows one to consider the question of slowing export sales due to rising prices.
As has been discussed since November, old crop prices are in a bullish mode and should continue so. However, new crop (2014 plantings) continues to have a difficult fight with the Bear. The near ten cent spread between new crop and old crop must come together at some point. The bridge to that meeting is a merger of the old crop July contract and the new crop December contract.
Typically, this plays out through lower July prices and increasing December prices. It is difficult to see that play out this year, but the market always finds the path.
With U.S. production set to increase three to four million bales this coming season the path to least resistance will likely see old crop prices begin to deteriorate in early May assuming that mills recognize the ballooning impact on prices if they insist on delaying fixations until late May or early June. Yet, the good news is that U.S. cotton acreage will, for a number of years, hold near the 11.1-11.5 million acre level.
