Like Poker, Cotton Market Full of Bluffs and Calls

While the old crop July contract still launches its few remaining fireworks, the December futures contract has become the lead month with respect to volume and open interest.

The December contract is attempting to consolidate its trading range around 77 cents and, for the time being, will most likely trade a very narrow five cent price range between 74.50 and 79.50 cents. This will likely hold through the first week in July when the market starts its second guessing about the July supply demand report.

Current market signals favor the bears and a market that trades in the middle 70’s most of the year. Yet, the year is only just beginning.

The past week’s roller coaster ride in July prices was about certificated stocks and short futures positions rather than about the supply and demand of cotton. That is, it was about end-of-the-year book balancing and end-of-the-game bluffs and calling the other’s hand. What developed was a total disconnect between futures price and cash price.

Merchants, faced with rising cotton prices, knew that cotton values would be lower within a week as the market transitioned from the old crop July futures to the new crop October/December futures. Since the market was inverted (today’s old crop prices are higher than next week’s new crop prices), merchants and mills both knew that cotton would be worth less within a week or so as the old marketing year ended. Thus, merchants were willing to drop the cash price (despite rising futures prices) to obtain a guaranteed sell.  If they did not, then there was an extremely high probability that the same cotton would be sold for even less.

Too, mills were ready to take the cotton at a somewhat lower price rather than wait any longer, as most mills have delayed buying to the bitter end and were running the risk of getting shut out of obtaining any quality cotton – i.e., being forced to take less desirable cotton.

Recall, the July contract was not “really” trading cotton, but rather trading who would hold the certificated stocks much like the final bluffs and calls as in the game of poker. Granted, that is extremely atypical in any futures market, but does arise somewhat at the end of a contract’s life, especially if the commodity is moving from one production year to another production year. Those fireworks are about done.

Nevertheless, the activity in July has made it very clear that mills are shopping quality machine-harvested cotton. Spinning mills have heard the mandatory request for quality products from upstream weavers and apparel manufacturers, all noting that the world consumer is now looking at cotton goods on the basis of quality and not price. The development of a large and affluent middle class throughout China, Southeast Asia and the Indian subcontinent has forced this issue.

The Northern hemisphere is rapidly moving toward a completion of planting, with the U.S. essentially concluded. As always seems to be the case, the crop just got in and is progressing well. Certainly, given the repeated moisture over the Texas plains, the U.S. crop in on track to climb above USDA’s current projection of 15.0 million bales produced.

The USDA June 30 planting report will be the next major cotton release coming from USDA. Estimated projections range from 10.7 to 11.4 million planted acres. My thoughts have been 11.1 to 11.3 million planted acres, and I will stick to that projection. However, some of the corn acreage first thought to go to cotton was switched to soybeans in the Mid-South and Southeast. But then, the excellent moisture received in the dryland area west and southwest of Lubbock could bring in unexpected acreage.

Indian plantings are generally on schedule, but possibly a bit late in total. India had been warned that the monsoon would be late, but then it received very good moisture early. Thus, it was thought that acreage would see a significant increase (and we still might). But the monsoon backed off, and now it has been delayed in the northern region. It is far too early to toss in the towel, but the situation bears watching.

U.S. export sales continue to impress as China, Southeast Asia, Turkey and others come to the plate week after week. Indonesia had cut its imports of U.S. cotton. But as it now ramps up its yarn exports to China, it has significantly increased its import purchases of U.S. cotton.

Prices should consolidate at the 77 cent level, basis December.

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