Cotton pricing cannot hold its level

Cotton pricing cannot hold its level

O.A.Cleveland Consulting Economist at Cotton Experts is the author of this feature, and TextileFuture would like for you to take note of his conclusions on actual cotton pricing

“The cotton train has gained momentum and keeps rolling along! Spurred by another round of Chinese fund buying, and underpinned by extremely strong sales of stocks from the Chinese Reserve program, the New York ICE cotton contracts blew past near-term resistance and back into the mid-70-cent range.

Two weeks ago, we suggested that the upcoming USDA supply demand report would be neutral, but the market would drop, but reverse itself and jump higher. Jump higher it did this week – wildly higher! First, prices fell lower than expected a week ago, and that should have been an indicator of the strength that this week’s move would have. It was considerably more than I expected.

I am reminded of what Macon Edwards, the good gentleman from Lula, Miss., said: “Those willing to climb the flagpole of price prediction are prepared to show their true character.” The 69-cent price barrier appeared too tough break through, but prices sailed through it, all the way above 73 cents before failing on Friday and easing back down to just above 70 cents for the weekly close.

The market shot up some 450 points during the week, only to lose about 160 points on Friday. But the bulls had a great week and the market showed it still had the moxie to climb above 72 cents. Not surprising, the 72-cent level is likely just too high too soon. The world crop, while facing various problems, might actually still be improving. Demand is growing, but is very precarious once futures prices touch the 72-cent mark. In fact, Chinese mills have shown some determination to switch to acid-based chemical polyester when cotton moves above 70-72 cents. But the pressure is building.

The 66.50 level has become critical in terms of establishing the low for the remainder of the season. That level must hold to maintain the bullish attitude of the market, and I am of the opinion that the lows are in and the market will now attempt to break above the hard price resistance between 72 and 73 cents.

Technically, a challenge of the highs above 77 cents can’t be ruled out, but there is a mountain of work that must be done to approach that rarified air. Thus, the trading range now becomes 66.50 to 73.00 cents. A break above 73 cents will set the stage for a test of the 77-78-cent highs. Again, I caution you not to “wait’ for that price level, as it is far from certain. I would be remiss if I did not remind you that some market technicals project a trade as high as 80 cents. Should the market reach that level, make sure you are already 95% priced.

Reserve Sales Could Top 12 Million Bales

Remember, the current price run – and the earlier run to the high 70’s – was associated with the very successful Chinese Reserve sales. Those sales are due to end on September 30 and will not be renewed until an as-yet-unannounced 2017 date. Chinese Reserve sales will likely reach 12 million bales by next week, proving to be more successful than any expected. The Chinese government will have succeeded in selling between 20% and 25% of its cotton reserves.

Granted, other fundamentals helped fuel the run into the 70s. Some of those will continue to affect the market:

  • Mother Nature is dumping too much moisture on parts of the big Texas crop and hindering a successful harvestParts of both the Brazilian and Australian cotton areas have been too wet to complete field work and could delay plantings.
  • Parts of both the Brazilian and Australian cotton areas have been too wet to complete field work and could delay plantings.
  • The Indian crop is likely larger than the recent USDA report, 500,000 bales or more. However, we continue to firmly believe that USDA must make major adjustments to its level of Indian stocks. Prices are simply too high to mesh with the USDA estimate of a 14-million-bale Indian carryover.

Call sales versus call purchases continue to add a colourful feather to the bull’s hat. The ratio jumped higher again this week in favour of call sales, a most unusual phenomenon for this time of the marketing season. Historically, the ratio always favour call purchases (the trades need to sell futures), but has become increasingly in favour of call sales (trades need to buy futures). This should be watched closely. Repeating from prior weeks, and adding to the bull’s line-up of star players, is the fact that certificated stocks available for October delivery are only some 34,000 bales, another imbalance in favour of potentially higher prices.

Growers that have not priced any crop should do so with December above 70 cents. The market does look ripe for higher prices, but be reminded that demand has shown signs of weakening at 70 cents and above. Too, it appears that mills are well behind in covering their needs in the near to intermediate future. They have counted too much on the availability of the current crop being readily available. Too, sales at the 67-68 cent level have been stronger than expected.”

This current export sales report can be viewed here

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