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Texas Rain, Monsoons and Cotton Prices All Linked in Bearish Market

Cotton prices have broken the 65 to 66 cent support level, basis December. And, besides the limited support between the 60 to 62 cent range, the next line of defense sits all the way down at 57 cents.

Market technicals suggest the 60 to 62 cent level will hold, at least in the very short run. Yet, the possibility of a trade below 60 cents looms large. The market is all but screaming for a correction, yet the bears are vigorously pushing for the 57 cent mark. In as much as the market stalled for nearly two weeks at the 65 to 67 cent level, the 60 to 62 cent support may be stronger than it appears.

Yet, prices did collapse once the 66 cent level was breached. Thus, the trend remains lower.

The potential for a further collapse to 57 cents lies with Mother Nature and her blessing of the Indian crop and the U.S. Southwestern crop. Just as the current price slide began with early June rains that washed across 100 percent of the Texas cotton acreage and proved to be the gift that kept on giving, the Indian monsoon has finally arrived in style and is now making its daily swing across the world’s second largest cotton production region. While much of the primary cotton acreage was planted some 60 days late (and planting even continues), the crop forecasters have not reduced the production forecast.

While India is on its way to become the world’s largest producer either this season or in 2015, it is likely this season’s crop will be reduced due to the shortened growing season. Yet, we are all aware that the “normal” weather cycles over the past four years have been anything but normal. As previously noted, long range weather forecasts call for very “abnormal conditions” as we move forward.

Speakers at last week’s New York ICE Cotton Forum pegged the U.S. crop within the range of 17.2 to 17.6 million bales. A crop this big depends on favorable weather patterns not only in Texas, but across the entire U.S. Cotton Belt. Due to its late start, the condition of the Texas crop continues to lag behind the historical average. However, the Memphis Territory crop and the high-yielding Arizona and California crops have all advanced beyond the historical average.

Most weather models are predicting a cooler and wetter late summer and fall for the all-important Texas crop, which includes over half the acreage and an estimated near half of the U.S. production. Granted, the crop has the fruit potential for very high yields. But early comments from the weatherman are not conducive to harvesting that potential. Nevertheless, cotton varieties planted on the Texas High Plains and Rolling Plains are referred to as “storm proof” for a reason.

Since the majority of Indian cotton plantings only began receiving monsoon showers in the last two weeks, the key has become both the intensity and frequency of showers. Showers of one to three inches every three days are not uncommon and even occur daily. A similar pattern will be necessary for the coming month, and then weekly showers are required. The forecast is favorable. However, the crop is severely late, and Mother Nature must provide ample sunshine and heat units to make the crop.

Thus, after suffering through the decision by China to let its prices float at the world price (now about 80 cents to the mill), the market slipped further after the June rains in Texas and now is facing the late arrival of the monsoon in the Sub Continent. Thus, crop predictions are full of bearish news for the market, and the harvest of such a crop begets even lower prices between now and December. However, the probability of harvesting such a crop is at best very challenging, and each chink in the armor-protected crop by the weatherman will allow a slow, but increasing price level.

The adages “Darkest before the dawn” and “Low prices cure low prices” that folks like me use to find some cheer for the bulls do have a market meaning. Humans trade commodities, and humans, if anything, are emotional. Thus, the downside is always overextended. So too, the topside.

Prices should see an increase in August and again in January. Those dates surround a period that includes peak harvest and the traditional harvest lows in the market. The New York Cotton Forum speakers spoke in terms of aggressive use of the loan and holding the 2014 crop well into the summer of 2015 when prices are traditionally in an upswing. Yet, they stressed that the prudent use of the loan would also include the purchase of July 2015 call options.

 

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