Bears Rule, As Market Awaits USDA Reports – and Monsoons

A quick bit of history.

This past week gave us the major squeeze that everyone knew would happen, but did not. Once the market realized a squeeze on the July futures contract would not occur, prices crashed as if they were Humpty Dumpty. The few mills that stayed around to fix call sales made out like bandits, but it should be noted that they had risked paying 90 to 100 cents rather than the 82 to 85 cents they paid.

It was a huge gamble, but it worked for them. By the time all was said and done, the volume was actually small.

July is essentially history, and December leads the way with a mixture of world crop conditions. However, the U.S. crop (and hence the major news maker with respect to price at present) is adding a few thousand bales a day. If you don’t believe me, just look at the daily price decline experienced in the December futures contract. The longs (and major speculators) have exited the cotton market, and open interest has fallen to its lowest in some 30 months.

A friend – Peter Egli of Plexus – suggested U.S. production was on track to exceed 17 million bales and offered a 17.5 million bale harvest this season. Personally, I would agree with him as Texas has (for now) turned into a greenhouse for cotton – i.e., as if it were the San Joaquin Valley. Compare that to the 12.9 million bale harvest in 2013, and one can see why the bear paws have scratched deep into the market price the past six weeks – some 8 to 9 cents lower over that time period.

The cotton market is now awaiting the upcoming USDA plantings report and the July 11 world supply demand report. USDA’s current plantings estimate is 11.1 million acres. Several months ago, my estimate climbed to 11.3 million, but the increase in soybean prices took my estimate back to my original 11.1 million plantings, and I will hold on that. The average of analyst estimates was 10.85 million acres, placing my estimate on the high side.

The market will be neutral between 10.85 and 11.1 million, but a number outside that range will move the market price a tad.

More importantly, however, will be the July 11 supply demand report and the level USDA places the U.S. crop at that time. Longer term, the U.S. crop gets bigger, the estimate for U.S. exports will be increased, and world trade will also be increased. The Chinese (and others) will be back looking for U.S. high grades and continue to shun locally-grown cotton.

The problem spot for the world crop this season sits in India, where the annual and all important monsoon has backed off again and remains absent. Plantings in the major regions are roughly one half of what they were at this time last season, and growers suggest they will not plant cotton until after moisture arrives. There is none in sight.

It is likely that next week’s trading will turn its head more toward India and less to the U.S. Thus, the market will see some recovery.

However, as those in my profession like to say, “Other things being equal, longer term.” December will challenge the 72-cent mark before all is said and done. Presently, any move above 75 cents should be viewed as only a short term rally.

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