Cleveland: Cotton Prices Rally to Point of Likely Resistance

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Cotton prices moved higher on the week, reaching a six month high as the March contract gave way to the May contract as the spot month.

Attempting again to climb above 90 cents, the market – while remaining strong – again sent signals that the 87 to 90 cent level brought on more rationing from textile mills. Based on export activity, the current rally has likely stalled at the 89 cent mark and will again test the mid-80s. The 90 to 92 cent target just seems too big of a bite for now.

Recall, the prior rally above 89 cents had only a brief life. This market likes the upside for now and likely will through its First Notice Day on the May contract. But the 90 to 93 cent hurdle will likely be too high to clear.

While export sales continued to sizzle, this week did mark the third consecutive week of lower sales. Nevertheless, net sales of all cotton totaled almost 210,000 bales. These were comprised of 120,300 RB of Upland and 7,600 RB of Pima for current year delivery, and 81,900 RB for 2014/15 delivery. Sales have now reached 9.3 million bales well ahead of the pace needed to reach USDA’s 10.5 million bale estimate. In fact, weekly sales from now until August 1 (25 more weeks) need only average 50,000 bales to reach that number. Most, including myself, believe USDA will need to increase its estimate some 300,000 bales.

The reason for USDA’s caution may lie within this week’s otherwise excellent sales report, which indicated that export cancellations raised their ugly heads to the tune of 65,100 bales from eleven countries. Granted, ten of those countries accounted for only 12,200 bales. But Chinese cancellations accounted for the other 52,900 bales, a bit large for this time of the year.

Additionally, it was reported that China sold some of its imported U.S. cotton for export (cotton bought at a lower price and sold for a good profit). Such action allows one to consider the question of slowing export sales due to rising prices.

As has been discussed since November, old crop prices are in a bullish mode and should continue so. However, new 2014 crop continues to have a difficult fight with the bear. The nearly 10-cent spread between new crop and old crop must come together at some point. The bridge to that meeting is a merger of the old crop July contract and the new crop December contract. Typically, this plays out through lower July prices and increasing December prices. It is difficult to see that play out this year, but the market always finds the path.

With U.S. production set to increase three to four million bales this coming season, the path to least resistance will likely see old crop prices begin to deteriorate in early May, assuming that mills recognize the ballooning impact on prices if they insist on delaying fixations until late May or early June. Yet, the good news is that U.S. cotton acreage will, for a number of years, hold near 11.1 to 11.5 million acres.

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