Cleveland: Trading Range Holds in Cotton's Dog Days of Summer

By Jim.Robinson|August 6, 2013

As is typical during the Dog Days of August, the cotton ventures off to the commodity trading sidelines and Mother Nature plays her invisible hand in crop development around the Northern Hemisphere. This year, as the vagaries of nature play out in all producing regions, the market is more focused on the Southwest U.S. along with the Southeast. India and China crop watchers are also being kept busy attempting to estimate crop development in those respective countries. These three countries are the three largest producers in the world. India and the U.S. represent the two largest exporters. With August 1 ushering in the beginning of the official 2013/14 cotton marketing year, it is noted that India has “caught” the U.S. and now exports essentially the same amount of cotton as the U.S. (over 11 million bales for both countries). Thus, another portion of the Great King’s crown has been chipped away. Nevertheless, the long term trading range from 81-82 cents up to 88-89 cents will most likely contain any and all trading now and until the December 2013 expiry.

Very importantly, I believe the cotton market is content with its current trading range when viewed from the comparative perspective with soybean and corn prices. The current price ratios will accommodate a small reduction in 2014 planted acreage. The temptation to take the market higher would most likely move the new crop December (December 2014 contract) higher, spelling a call for increased acreage in 2014. Yet, demand signals are not sending such a message. Therefore, any suggestion of increased acreage in 2014 would likely send both 2013 and 2014 prices lower. There remains more than ample time to discuss 2014 acreage, but for now let’s view next year’s U.S. plantings at between 9.5 and 9.7 million acres, that is, if the current trading range is to remain in place.

The August USDA supply demand report will be released on Monday August 12. Thus, we have another week to guess the USDA numbers. Expectations are that some 200,000 acres will come off the current USDA crop estimate – bringing it down to 13.3 million bales and lowering U.S. carryover down to the 2.6-2.7 million bale range. No other changes are expected in USDA estimates for the U.S. situation. However, world demand should see a slight boost owing to higher than expected international economic activity, especially in China as well as the continued Chinese appetite for raw cotton and cotton yarn. Too, in line with increased demand, ending stocks should fall. Additionally, there should be a reduction in the amount of Indian carry-in stocks.

Nevertheless, for all the sugar coating I can find, it remains the Dog Days of August when the typical cotton trading week is dull at best. The industry is not on vacation, rather simply the market is caught with traders doing nothing more than sizing up the 2014 crop and beginning to prepare for the transition to the new harvest. The dullness will continue at least another week; longer if the August USDA report does not have any surprises. The outlook: The trading range holds and the market muddles through the month of August.