The bears continue their month-long rule of the cotton market, reinforced by additional moisture over a portion of the drought-stricken Southwest, coupled with the speculative fund’s market exit strategy of either profit taking or the rolling of long contracts which traditionally occurs with the approach of first notice day.
July is barely atop its 85 cent support level, while the new crop ICE December contract sits on its 77 to 78 cent support level.
The selloff in July has uncovered more and more demand as evidenced by the weekly export sales report. Nevertheless, Mother Nature will likely pepper a major portion of the cotton area in West Texas, the central part of the state, and the Coastal Bend. All of the moisture will be welcomed, leading up to the late May/mid-June period being referred to as the billion dollar rain instead of the million dollar rain.
December will likely remain under pressure, while July should find excellent support at the 85 cent level.
With July eleven cents below its three month high, U.S. export sales of Upland for immediate delivery climbed to a net of 131,500 RB for the week ending May 29. China continues to be the main buyer of U.S., taking a total of 81,400 bales. Upland sales for the 2014/15 marketing year were 176,400 RB. Again, China was the primary buyer, accounting for 83,600 bales.
Pima sales for the current season were 3,100 RB and 900 bales for the 2014/15 season. Shipments of Upland for the period were 168,200 RB, while Pima shipments were 11,400 RB. The primary destinations for this export delivery were Turkey, Vietnam, and again, China.
As if a sore thumb, China continues to “stick out” as the principal taker of U.S. cotton, although the country’s spinners have also been major buyers of both Australian and Indian cotton. The world cotton industry – overwhelmed by the size of the Chinese National Reserve cotton stocks – continues to underestimate the volume of foreign demand coming from Chinese domestic spinners.
Simply put, the demand for foreign cotton is being driven by the renovation of existing mills and the investment in new mills – all with new machinery that operates best with machine-harvested, high grade cotton. And, the most logical suppliers of that type cotton are the U.S., Australia, Brazil, West Africa and some Indian types. Specific reasons make U.S. and Australian types the favorites of Chinese mills.
Thus, once again, reports that China will sharply reduce imports are simply not true. China will continue to be the world’s leading importer of cotton for at least the next five years, and most likely ten years out and longer.
The USDA June supply demand report should include an increase of 100,000 bales in U.S. exports, which translates to a 100,000 bale reduction in U.S. carryover. However, this late in the season, USDA may just punt and wait until the August report when actual season-ending data are available. Additionally, the forecast for the coming 2014 crop could be increased 200,000 bales to reflect the far better than anticipated moisture that has covered the Southwest. This should also be reflected in an increase in exports, but again, the entire industry seems to underestimate the import demand coming from the Chinese mills.
The December contract, while in a bearish mode, could well see as much as a 200-point rally. However, the 75 cent support will likely be tested longer term. Likewise, there is considerable price resistance at 79 cents and again between 81 and 82 cents. Demand should continue brisk with July at 85 to 86 cents, and this will allow consumption to demonstrate a slight improvement.