By Jeff Thompson, Autauga Quality Cotton Association
Anyone old enough to remember the very first video game, AtariΆs “Pong”, will recall watching a digital ball being passed back and forth between two electronic paddles. It was almost hypnotizing getting caught up in this slow methodical action. The cotton market reminds me of this game as it continues its narrow range bound trading.
Last week was no exception as it tickled 70 cents on the high side while brushing 66.85 on the low to lose only 23 points on the week closing at 67.50. Sound familiar?
However, those who played this game will also remember the more times the ball passed from paddle to paddle it gained speed becoming ever more difficult to hit until finally it was missed. The cotton market is sure to follow suit as volatility will increase causing a breakout to one side or the other.
There are several uncertainties currently surrounding this market whose outcome will greatly influence its ultimate direction.
Last week, there was much concern as roughly 25 percent of the U.S. crop found itself threatened by Hurricane Matthew, the strongest storm so far this year, as it approached the eastern seaboard.
Upon making landfall this past weekend, fortunately, most of GeorgiaΆs estimated 2.4 million bales were spared but this is no consolation to those growers in the Carolinas who took a direct hit and whose estimated 800,000 bales will be significantly reduced. Our hearts go out to those affected, for this is two consecutive years they have faced disaster following the extensive flooding of the 2015 crop.
Though disastrous for those directly involved, being a small percentage of the total U.S. crop the market has shown little reaction. This Wednesday, October 12th is the scheduled release of USDAΆs October Supply/Demand Report.
With the market experiencing a limit down day after both the August and September report, awaiting this monthΆs report is like preparing for a root canal. IΆd just as soon skip it.
Historically, the October report is never too revealing, though bringing with it few, if any, adjustments. Look for little change in U.S. production since storm damage is too recent to be considered.
ItΆs on the demand side where factors are shaping up to be more positive despite whether USDA takes this opportunity to increase U.S. exports. After last weekΆs favorable export sales of 182,500 bales, we now have sold half of the 11.5 million bales previously estimated.
In addition, the escalating trade dispute between Pakistan and India gives us further reason to believe these export numbers will be exceeded. This underlying sense of renewed demand lends greater optimism that a break to the high end of this trading range is possible over time.
Finally, you canΆt talk about the market without mentioning the specs which have provided much needed price support. Open interest in the futures market is at the equivalent of 24.5 million bales, an 8 year high. This huge long position held by the specs and the trade is certainly cause for concern considering the volume that could potentially be shorted.
However, recent actions on their part provide us some comfort as you see open interest actually increase when prices rally and decline ever so slightly when the market sells off. It appears their affinity for cotton remains intact, at least for now.
At the risk of sounding like a broken record, look for the “Pong” game to play on as prices bounce back and forth from support at 65 cents to resistance at 70 cents, at least for the short term.
