It was a most excellent week for cotton producers and cotton market bulls. The ICE Dec contract surged, advancing 847 points on the week as the recent slight carry in the market gave way to backwardation.

Have the bears been trounced? Perhaps. This weekΆs surge was not solely a result of technical factors or fundamental information, but was rather a combination of both. The fundamental push that catapulted Dec from its long-standing trading range and ahead of the Dec 15 contract high was met with abnormally large volumes of short-covering and fresh buying.

The USDA projected world ending stocks about 3M bales lower Vs June, most of which could be accounted for by estimates and projections of consumption. This is something that we have not seen in a while. Of course, it goes without saying that the demand side of the equation has been the most troublesome for cotton for some time.

Reports and rumors from China echo the USDAΆs foretelling of an increase in demand as mill owners there attempt to coax the central government to allow increased imports, particularly of higher quality cotton, increased daily limit offerings at release auctions and also to extend this seasonΆs auctions beyond Aug.

The market blasted off despite a projected US crop of 15.8M bales, partially due to an increase of 200K bales to the 2015/16 export estimate, but mostly from a 1M bale bump to the 2016/17 export projection. The US share of world trade is currently expected to expand to around 35% Vs approximately 27% for the current marketing year.

Estimates and projections of smaller than originally expected production in key cotton producing nations and regions such as China, India, Pakistan and the African Franc Zone are expected to increase the need for US exports over the near-term.

So far, the balance of the US crop has been reported in fine shape, but extremely hot and dry temperatures have seized West Texas just ahead of the peak fruiting period. Any contraction of expected US production could push the current market higher to challenge the only remaining gap on the front month continuation chart, which is located just below the 78.00 level.

At the producer level, we are seeing a few merchants get somewhat more aggressive with their forward contract offerings. But the merchant sector as a whole appears to be confident in their ability to find spot cotton in the fall and avoid the inherent quality risks in forward contracting.

At current prices and basis, we believe it makes sense to cover a portion of your estimated production. While each individual has to take their own risk tolerance into account, it would seem prudent to lock prices in on 25-50% of estimated yield and consider puts on rallies over 75 cents base Dec.

For next week, the standard weekly technical analysis for and money flow into the Dec contract are bullish, to say the least, but the market also remains very much overbought. Export sales for the week ending July 14 hold the potential to weaken further. Strong support for Dec should be encountered near recent resistance from 67.00 – 68.00 while strong resistance will likely be encountered near 78.00

Have a great weekend!