Cotton Market Ready for a Low Price Cure

The cotton market is finally in the mode of curing low prices.

Fifteen of the past 17 trading sessions have been in the red, as the month-long decline moves into its second month. The only real cure for low prices is low prices. And while prices remained under pressure all week, the downtrend was near flat this week.

As suggested, the 65 to 66 cent doorstep is but a moment away. But for now, the 67 to 68 cent level is providing support. Possibly, that level will hold the price deterioration, but at least the bloodletting has ended, and downside risk is very limited.

The ICE New York contract has fallen to the level that U.S. and other cottons are very price competitive at the Chinese mill door. Too, at the current price level, U.S. and some other qualities are highly desired by the Chinese mills. Thus, with New York futures prices in the mid 60’s, U.S. export sales will continue to see a significant boost.

Crop conditions across the U.S. continue to improve as the U.S. crop plays catch up. This year’s crop progress has been behind average, but has all but caught up and is no longer considered to be a negative on yields. The full potential of the crop remains in front of it, and USDA’s August world supply report will provide the first objective yield estimate of the 2014 crop.

The current crop estimate is 16.5 million bales. However, since that estimate was made, the weather has generally been ideal across the Belt. The crop potential is likely 750,000 to 1.0 million bales more than that, but Texas weather will remain crucial.

USDA enumerators will be in cotton fields the last several days in July and the first few days in August assessing crop conditions. Thus, the August crop report and the August supply demand report will be based on conditions as of August 1, 2014. The results will be released by USDA on August 12 – still three weeks away.

The month-long drop in prices has also brought out international mills. Mills had been slow to take up cotton for the out months until last week and have continued to rev up their action.

Merchant sources suggest that mills were active buyers again this week. The latest weekly export sales report for Upland included net sales of 20,900 RB for immediate delivery and 342,800 RB for 2014-15 marketing year delivery. An additional net 500 RB of Pima were sold across both marketing years.

Turkey, Vietnam, China and Mexico were the primary buyers and represent two-thirds of the most active markets for U.S. cotton. However, sales were made to 19 countries – a sign of both widespread demand and mills’ willingness to commit to long term delivery contracts. This was the most active the export market has been since early May.

Last week’s comments focused somewhat on the Indian monsoon situation. Since then, the monsoon has blessed the drought-parched Indian northern cotton area, and crop conditions have improved and planting has restarted. Much will depend on the strength of the monsoon and its length. The crop has lost some yield potential, but a disaster has been averted.

In the absence of unexpected news, the market will be slow to recoup losses. We should not be surprised to see a challenge of the 70 to 72 cent level in December. But likewise, a 66-cent trade should not come as a surprise.

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