Bulls Continue to Run the Cotton Market; Short Term Rallies Possible
February 21, 2014 Cotton prices flirted with 90 cents all week as the New York nearby May contract battled to climb above that mark.
Speculators were on both sides of the battle, as hedgers stayed clear of the skirmish. Yet, mill call sales continue to mount on the July contract and will force hedgers to join the battle on the side of the bulls sooner than later in the absence of a sell-off down to the 86-cent area.
Call sales are beginning to approach the 2011 level which boosted prices to previously unchartered territory. There is no fear of such a blow-off in price activity this season. But, mill call sales must be closely monitored, as there is an outside possibility they could cause prices to zoom toward the mid-90s. I do not expect that to happen, as mills will most likely slow operations first. But the nearly 26,000 July mill call sales are very bullish and could explode prices.
Yet, such a price rally, if it were to come about, would be here one moment and gone the next. Under such conditions, merchant offers will be generally scarce, so be prepared to take quick action.
Net sales of U.S. cotton continue to mount and move further ahead of the pace necessary to reach the current USDA forecast, thus increasing the prospect that USDA must raise their numbers. Cooperatives and merchants report strong daily inquiries for sales. Net sales for the current week totaled 70,500 RB of Upland and 7,700 RB of Pima. Upland sales for the 2014-15 marketing year were 203,700 RB, an indication of expected robust demand.
Yet, as noted last week, the issue of export cancellations surfaced again this week. Cancellations – all Upland – totaled 82,500 RB, with Turkey, China and Vietnam accounting for nearly the entire amount. Three other countries – Singapore, Korea and Thailand – accounted for the rest. Thus, while cancellations were not widespread, the bulk came from the most recent active buyers. This issue will hang over the market and act to tone down bullish signals.
The active trading range of 87 to 89.50 cents will likely dominate most trading as the market makes additional challenges of the 90-cent mark in an effort to reach its first objective of 92 cents and then challenge the 96-cent level. I continue to remain uncomfortable with the market’s attempt to establish ownership above 90 cents, yet neither can I ignore the building mill call sales price fixations that are boiling under the market.
This week, USDA projected 2014 U.S. plantings at 11.5 million acres, with a total estimated crop of 16.3 million bales, compared to the National Cotton Council’s survey of grower intentions of 11.2 million acres. I do get a very positive sense from meetings with growers that acreage will increase across the Cotton Belt, led by the Southwest, Mid-South and parts of the Southeast.
My guess is that the USDA number is marginally on the high side, but is certainly within reach. That’s good news. The great news is that the cotton industry can look for acreage to hold in the 11.2 to 11.5 million acre range for a number of years.
The new crop December contract continues to trade at the 78 cent level and will come under pressure if the USDA estimate becomes reality. Growers are cautioned that market expectations do not call for the December 2014 futures contract to scale much above 80 cents at the maximum. Yet, new seed varieties – with a little help from Mother Nature – offer yields of three bales per acre to many growers.
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