By Dr. O. A. Cleveland
Professor Emeritus
Mississippi State University
Last weekΆs release of the October supply and demand report opened the door for a major decline in cotton prices. The marketΆs initial move, some 300 points lower, was followed by a day of higher trading; at times regaining as much as half of the earlier decline. Thus, the market remains locked in a near month old very narrow five cent trading range, 98-103 cents. Thus, the wider and now long discussed 94 to 107 cent range continues to hold the market within its grasp and is giving every indication that prices will now test the lower end of that price range. The seemingly bearish October supply demand report almost begs for lower prices. However, the price movement is suggesting that the reportΆs news was already in the market. Look for December to grind itself lower for a test of the major support in the 93 to 95 cent area.
In its report, USDA increased the size of the U.S. crop by 52,000 bales, up to 16.6 million. Exports were lowered 500,000 bales, down to 11.5 million bales. This change carried through to ending stocks as the USDA estimate was increased from 3.4 to 3.9 million bales. Nevertheless, the stocks-to-use ratio for the U.S. is a low 25%.
The price damage, however, resulted from changes in the world cotton situation as the estimate for production was increased to 124.2 million bales, up1.2 million from last month. Increases were noted for India, 500,000 bales; Australia, 500,000 bales, Pakistan, 200,000 bales, and Brazil-300,000 bales. The notable reduction was in China losing 500,000 bales on a crop that was estimated at 33.50 million bales. The Indian crop was forecast at 27.5 million bales. World consumption was reduced 850,000 bales with reductions noted in China, 500,000 bales; Bangladesh, 200,000 bales, and Vietnam, 200,000 bales. The estimates appear to have overstated the decline in Chinese consumption. Accounting for other changes in historical data, USDA now projects world carryover to jump nearly 3.0 million bales above its September estimate. That is, world carryover for the 2011/12 marketing season is expected to climb to 54.8 million bales. This is equivalent to a world stocks-to-use ratio of 48% and suggests the world is somewhat awash with cotton.
Thus, with larger supplies, lower consumption and higher ending stocks, the ability of the December 2011 crop to hold it 93-95 cent support will be challenged. The next major support falls all the way down to 82-83 cents. However, the competition for acreage between grains/oilseeds and cotton should help the 93-95 cent support level hold.
Additionally, recall that China is actively beginning to purchase cotton to replenish the government owned strategic cotton reserve stocks. These purchases are expected to total several million bales and are offsetting the bearish impact of sluggish world consumption. The buying is activated just above the major technical support level (93-95 cents) and, in some regards, is acting as a world floor price.
Another market adage: If the market fails to move lower on a bearish report, then the report was not bearish, we just thought it was. Remember, while it often times over corrects, the market is always right. It is just us pointy headed guys that canΆt read it at times.
