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Market Bumps Up Over World Supply Worries

Concern over the amount of cotton available outside of China continues to dominate trading. A late Chinese crop, declining almost daily, has placed a premium on world cotton supplies available for immediate delivery, as well an additional premium for high quality non-Chinese cotton.

This week’s positive close cannot be characterized as an uptrend. But the combined activity of the past two weeks suggests the status quo of lower and lower prices has ended. The downtrend, now two months old, saw the New York ICE December futures contract lose some 25 percent of its value through last week. Now the market is off only some 18 percent from its value in late July.

I continue to believe there is a very heavy hat sitting on the market in the 67 to 68 cent area, basis December, and it will take much work to move that aside. Yet, global crop concerns are suggesting that the world crop, including the U.S. crop, is shrinking. The U.S. crop condition index has moved lower for four consecutive weeks.

While I do not expect any change in the current trading pattern, there is growing belief that the low for December has been made and the 62 to 63 cent area will not be revisited in the near term, and likely not at all. Nevertheless, the 67 to 68 cent price resistance will hold firm until the mid-September USDA World Supply Demand report.

The potential for weather-related, reduced crop scenarios appears to be playing out around the globe. The U.S. is plagued by the lack of moisture on the dryland Texas and New Mexico crops. The dryland crop in the Southeast has cut out and only the mature bolls that are on the plant will be harvested. The Mid-South crop, while ahead of schedule according to statistics, has seen its harvest potential cut short by the lack of the necessary heat units required to take what fruit is now on the plant to full maturity. Additionally, the crop is now well past the typical time when a white bloom can develop into a harvestable boll.

India has again turned a bit dry, as the late arriving monsoon – after exciting everyone four weeks ago – has lacked carryover and is giving signs of withdrawing. There remains time, but long range weather forecasters, who have been so accurate this season, are now predicting an early withdrawal of the monsoon. That would leave India short of grabbing the coveted title of   “world’s largest cotton producer” away from China.

Likewise, the aforementioned Chinese crop, already expected to be late, is now faced with drought conditions that have reduced expected yields. Drought conditions also imply potential quality problems, and the long discussed quality problems with the Chinese Reserve stocks continue to make it necessary for China to be an active buyer in the world market.

China is now complaining that the recent deliveries of Australian cotton were not up to earlier standards. Actually, Australia has already committed its 2014 crop and, like the U.S. (until the new crop comes in), has been sending recaps. The early U.S. crop (Rio Grande Valley and Coastal Bend) has been in strong demand and is about totally committed.

U.S. export sales have seen a surge from the reduced supplies around the globe. Last week, some 21 countries were buyers of U.S. cotton for 2014/15 delivery. This week, 18 countries were in the market.

China was an active buyer both weeks, buying in volume. In fact, China purchased some 45 percent of this week’s announced net sales of 158,200 RB of Upland and Pima. The prior week sales to China accounted for almost 30 percent of total sales. Sales to China have totaled near 125,000 RB over the past two weeks.

Additionally, U.S. sales are well ahead of the pace needed to meet USDA’s forecast for the current season. Actually, export sales only need to average some 137,400 bales to reach the USDA projection of 10.7 million bales (calculation allows for typical carryover sales). While actual weekly shipments so far in August were only about 100,000 bales, remember the current availability of cotton is very limited. Shipments will move much higher in September and October.

Growers planning to price their cotton at harvest may wish to purchase a May call option while the December price remains in the 65 cent range.

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