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Rain Washes Markets Lower, Watch for Short Term Volatility

To borrow a long existing quote, “When it Rains it Pours.” And pour it did, essentially on the entire drought-stricken Texas plains and the U.S. Southwest.

Yes, there were a few locations that did not receive rainfall, but only a very few. Dryland cotton growers are still dancing in the streets in celebration of two to four inches of rain.

As expected, the moisture sent prices three cents lower almost immediately. The bulls ran for cover with more muster than mill fixations could provide price support. The market is now down some 11 cents in the July contract and seven cents in the new crop December contract, and is attempting to hold the line on any further price decline.

Because of demand, the July contract will likely have more success than the December contract on any attempt to move higher. Yet, the July contract will most likely struggle on any attempt to move above 88 cents. December will have its hands full holding 75 cents, and will not if the Texas dryland receives any more timely moisture.

The cotton bulls were completely “done in” by the rain, as weather-related speculative selling and grower hedging left the market with few buyers. Past this initial selling, the price dip echoed across the trading community, and speculative funds bailed out of their massive holding of longs – historically one of the largest long positions ever held in the cotton futures market. The profit taking from the large funds drove prices below trend lines.

The July contract can still jump higher, but December prices are likely locked in a downtrend. As we had commented many times, Mother Nature was in charge.

With July futures less than three weeks from first notice, day prices should be expected to be highly volatile. Too, July futures should find support from an increase in export sales, especially given the current low prices (85 to 88 cents). However, the new crop December futures contract will remain under pressure for the coming month, as planting progress across the Northern Hemisphere has crossed the midway point.

U.S exports sales for both seasons were some 180,000 RB, with China taking some 23,000 bales for immediate shipment.

As if the rains in Texas were not enough to send prices lower, the Indian monsoon – predicted to be very weak and late – has arrived early. Indian growers are viewing this as a signal to increase cotton plantings, and this increase should move India to the position of the world’s leading producer. Likewise, India will soon become the world’s principal consumer of cotton as the Chinese textile spinning contracts.

Yet, China continues – and will continue – to be an active importer of cotton. The Chinese mills continue to shun the bulk of offers from the Reserve, preferring to pay a premium and import foreign growths, principally Australian, U.S., West African and Brazilian – all machine-picked high grades.

December must now overcome the market’s perception that all Texas drought problems have been solved. Mother Nature will continue to keep an active hand in crop progress as, despite the rains, there is still a severe lack of any subsoil moisture. In the meantime, December prices will remain under pressure. Look for a trading range from 72 to 80 cents.

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