Bullish Market Run Continues As Weather Concerns Mount

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Cotton prices settled 100 to 200 points higher on the week as bullish fundamentals continue to build and speculative funds add to their already bullish positions.

As broadcast to you over the past month, the unfixed on-call sales, along with the severe weather affecting the world’s major producing countries, have laid the groundwork for price optimism. The potential 2014 U.S. crop, as well as the Chinese crop, is dwindling in our sight. Incredibly, the end-of-the-marketing-year unfixed July call sales are growing instead of shrinking.

I do not recall any previous year when such has ever occurred, at least in an active market. Almost as incredible is a significant increase in open interest in both the old crop July and the new crop December contracts. The demand for U.S. crop is weak, because A) most of the available supply is high micronaire and/or barky, and B) foreign-grown cotton – while still above 90 cents – is three to five cents less than the price of U.S. growths.

Demand for high quality U.S. cotton continues strong, but it is in extremely limited supply. Additionally, the potential for a weather-reduced 2014 crop is only adding more value to little old crop that has not been sold. Little to no physical demand exists with July futures above 96 cents, but the aforementioned factors could push July to that magic one dollar level before all is said and done.

The demand for physical cotton does not justify one dollar. However, the demand for pricing the unseasonably large number of on-call sales that must be fixed (priced by buying futures) over the next 35 trading days until first notice day on the July contract can easily justify that magic price level.

New crop December has held above 82-83 cents with ease. It has all but breached its 85-86 cent resistance point and could add another nickel in the absence of a Memorial Day/first week of June rain in the Southwest. Small pockets of the Rolling Plains have had some beneficial moisture, but the vast acreage of the High Plains Districts 1-N and 1-S remains totally dry – the third driest in at least 50-70 years. A soaking rain by the first week of June would take up to 300 points out of the market, but it would only represent a one-month band aid before needing major attention again.

The combination of these factors will likely make for extreme price volatility in the July contract. Likewise, some of that volatility should also surface in the December contract.

Of course, the July contract will be more price sensitive to weather in the Southwest. Yet, the water-logged Mid-South and Southeast are also on the radar as well. The old adage for those crops is that they “always get in.” Yes, they do. But it is time to dry out, as planting is already delayed in both regions. The high-yielding California crop has, for the most part, either switched to Pima or lost to Upland this year due to the sharp reduction in water allocation for irrigation.

The northern region of China’s cotton belt continues with its weekly freezing rain and snow. Thus, the 2014 Chinese production can now be some 25 percent below its 2013 crop. Suddenly, the massive level of Chinese stocks is not so massive any more. Too, China’s goal is to continue reducing cotton plantings in favor of food/feed grains and remain a net importer of cotton.

Export sales are shrinking, given the market is at 95 cents and above. Yet, export commitments stand at 89 percent of USDA’s annual projection. This is identical to the five-year average for the same week in time.

July could get wild, trading a ten-cent range from 90 to 100 cents. December will make a run to 86 cents and try for more.

Cleveland is a Professor Emeritus, Department of Agricultural Economics, Mississippi State University.
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