Market Yawns as Trading Interest, Demand Continue to Build

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Old crop prices slipped some 200 points on the week, and the new crop December contract settled marginally higher. Thus, the market was a wash during the week despite trading through triple digits most days.

Open interest continues to build, U.S. export sales picked up despite the implications read in USDA’s May supply demand report, and Mother Nature continues to be far from agreeable with her weather blessing on the world 2014 crop. These bullish price indicators, coupled with this week’s lower price for old crop, appeared to uncover more and more immediate demand, as a number of mills have yet to cover their second quarter needs.

Chinese mills report that the demand for yarns produced from 100 percent U.S. cotton has increased. This is an indication of the increasing demand from global markets for quality fabrics. Too, the July unfixed call sales continue as the primary near term fundamental supporting the market. Thus, price activity should remain unchanged into the last week of May and the first week of June. The old crop July contract faces a trading range between 90 and 100 cents, with December’s range holding between 82 and 88 cents.

The market gave little more than a light yawn with the release of USDA’s May supply demand report. Little fresh fundamental news was provided. With few exceptions, it was all fast balls down the middle of the plate. That is, with just three months remaining in the 2013-14 marketing season, the estimates for supply and demand were little changed from the prior month. The mild surprises were the reduction in 2013-14 U.S. exports by 300,000 bales – now estimated at 10.4 million bales – and another slight increase in world ending stocks.

With respect to exports, as previously commented, several markets have yet to conclude their second quarter business. Thus, both export sales and shipments should improve.

Yet, do not be surprised that it comes to pass that the report should have been considered bullish for several reasons relating to the supply side of the price equation. USDA’s projection of the 2014 crop was 14.7 million bales – nearly two million above the 2013 crop, but well below the expectations of most and the lowest of all projections.

Comment: Do not be surprised if the 2014 U.S. crop drops closer to 14 million bales. USDA is projecting nearly a 3.0 million bale world production increase in 2014 over the 2013 production. Yet, with planting delays and global weather difficulties being the major culprits, 2014 production will be under the gun to even meet 2013’s 117 million bale production. Further, USDA now projects that world carryover will make its fourth consecutive record increasing, moving up to 102 million bales by August 1, 2015.

With demand finally improving in Western Europe and China’s intent to continue importing raw cotton (albeit less than in the prior three years, but well better than USDA’s estimate of a one third reduction), world cotton demand should continue to support prices near or above the current level. The sad news, according to long range weather historians, is that the current Texas drought has, by some estimates, recorded the most severe conditions in over 100 years. That suggests the ongoing drought could last another two to three years.

That should do it! Now that an economist has predicted the drought to last another three years, rain should immediately begin to pour.

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