Old Crop Prices Remain Bullish; New Crop Shaping Up as Weather Market

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Cotton prices held well above the 90-cent level, basis old crop all week. The new crop December contract seems to have its teeth sunk into 81 cents as it continues its trek to break above the 82-cent resistance level and push for 85 cents. Exports were stronger than expected last week and helped the market find a sliver of good fundamental news.

Prices, while moving above last week’s, continued to be extremely volatile and will likely remain so. Just as I had applauded the market’s ability to reduce the spread between the old crop July contract and the new crop December price, this week’s action saw the spread widen again, settling the week above eleven cents. This current spread tends to add to the nervousness of July longs, as cotton delivered on the July contract (if such were possible today) would immediately lose that same eleven cents in value, given that December is trading about eleven cents below the July contract.

Nevertheless, the unseasonably high level of unfixed on-call sales to textile mills remains as a vigorous bullish fundamental. Volatility will remain as the primary event in the market as prices attempt to move higher. Yet, cotton demand will suffer should prices move higher.

The discussion regarding July delivery may seem premature since the May delivery has yet to begin. However, as July is the final month of the old crop contracts, all on-call mills sale fixations (mills buying futures) must be completed by that time. As the market enters the May delivery period, it does so with the trader’s knowledge that if mills do not fix their price on the May contract, then they must fix on the July contract. They can no longer roll to the next contract month. Time has run out.

While this will play out from mid-June into July, merchants and cooperatives are now positioning themselves to deliver on the May contract if need be and/or to deliver cotton against the July contract. Cotton delivered against the May contract will likely hold its value until mid-to-late-June. However, as noted, the minute the July contract expires, cotton that was delivered on July contract will lose the amount of the price spread between July and December contracts.

Market purists could take issue with that comment, and rightfully so. However, it is effectively correct, since pure/perfect competition exists only in theory.

Certificated stocks are increasing almost every day, as is the “awaiting review” category. Merchants and cooperatives are certificating cotton in order to deliver against the May contract or, if necessary, against the July contract. After all, the futures market offers a higher price than either the domestic or export market, even for quality cotton.

One concern – limited as it is – is the certification of a large block of Arizona cotton which is moving to certification storage in Dallas. The industry refers to this as cotton “out of location,” since the Arizona crop moves to the export market from a West Coast shipping point. That cotton must now be moved from Dallas back to the West Coast for delivery – an inefficient and somewhat costly situation, since anyone taking delivery of this cotton will find it expensive to move it back to the normal trading location. This will offset some of the bullishness associated with long positions and also potentially add tremendous volatility to the market.

Year to date, the pace of U.S. exports measured as a percentage of shipments to total exports has averaged 93 percent, compared to 98 percent on average. The difference is negligible and not suggestive that exports will not reach the USDA estimate. Recent weekly shipments have actually been rather strong.

The U.S. drought continues to add to the value of the 2014 crop. Yet, as discussed last week, the Southwest still has time to receive moisture.

Other new crop bullishness this week was associated with the intentions and actions of Chinese growers. Planting has been delayed there as freezing rain continues to spread across the area. Additionally, since the government has not announced its new crop price support system, many now feel that cotton prices will only be lightly supported by Beijing. This is consistent with the message the government has been announcing for over a year. As a consequence, Chinese grower intentions appear to have been scaled back. The current thought is that planting will be some 22 to 25 percent lower than last year.

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