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Cleveland: What Goes Up, Must Readjust

Cleveland: What Goes Up, Must Readjust

Cotton prices were down most of the week and settled at 68.08, basis December.

Actually, trading was a continuation of the selloff that began September 23 with a week-to-week loss of approximately 320 points in the December. Last week’s higher prices limited export sales, and prices had to move lower this week, back down to mill offers.

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Remember, mill offers had previously risen, so it should be expected that there will be some firmness at current levels. There was minor mill support at the 67-69 cent trading range, encouraging mills to come to the market with price fixations.

The key price support between 67.00 and 67.50 cents held all week. That is the major price support level necessary to prevent the nearby December contract from falling below 65 cents. Too, that support level should prove to be exceptionally significant. The narrow 68-70 cent trading range will be dominant, but price activity slightly higher or lower should be expected. Price swings of 300 to 400 points between 72 and 68 cents can easily be the norm as we move into the peak harvest season.

Harvesting is underway throughout the Northern Hemisphere, but is still in the early stages. Too, the Indian crop remains delayed due to the late arrival of the monsoon. Early indications of U.S. yields support the big crop suggestion for the Southeast and Mid-South. The Mid-South will experience a triple handful of one ton yields. That has been more associated with the Coastal Bend and irrigated Plains of Texas generally, but those areas suffered major yield-reducing weather impacts this season.

USDA enumerators are in the fields over the weekend collecting yield data for the development of the October crop production report. I hold to my last month’s estimate of 16.3 million bales – 200,000 bales more than the September USDA estimate. Some estimates place the crop at 16.4 million. As stated, I am at 16.3, but 16.4 may prove to be correct.

Fruit development and maturity continued all season, and September was generally open and October is expected to be as well. Texas weather has been less than cooperative, but generally, damage will be more associated with quality rather than quality. Too, the quality damage may prove to be very limited.

The Indian crop, still late and facing the withdrawal of the monsoon sooner than expected, is likely some 500,000 bales larger than the current USDA estimate. Australia could be lowered, but only due to possible prevented plantings. Thus, USDA may elect to leave that estimate unchanged for now. The Chinese crop could also be further lowered.

The late Indian crop has actually been a boon to U.S. exports. Pakistan, due to its weather-reduced crop, has been an active importer. The U.S. has been a primary supplier, as the late Indian crop has caused business to be shifted to U.S. growths. We still hold hope that USDA will back off its level of Indian carryover, but otherwise expect to see as much as a 1.0 million bale lowering of world stocks in the October report. Too, an increase in U.S. exports is expected.

U.S. exports just compiled its weakest weekly sales of the marketing season for the week ending September 22. However, season-to-date total sales have been phenomenal. The current week’s sales were only 91,100 RB of Upland and 21,600 RB of Pima. Thus, Upland sales were off 63% from the prior four week average. Yet, sales made during the week were at some of the highest prices of the marketing season. Thus, it had been expected that the price advance had severely restricted sales, as was the case.

The argument for increased U.S. export sales is based on the year-to-date export activity. Export sales to date total 5,313,400 RB. This compares to the year ago level of only 3,200,000 RB. Shipments to date total 1,423,200 RB, compared to the year ago level of 901,200 RB.

Too, the weekly export data published by USDA is reported in RBs (running bales). The conversion of RBs to statistical bales, or 480 pound bales, is a multiple of 1.04.  If U.S. export sales average 200,000 bales weekly over the remainder of the season, U.S. exports would climb to 14.5 million bales.

The reduced crops in Pakistan, East Africa, Brazil, and India have boosted U.S. export sales. Australian, Brazilian and U.S. cotton have dominated export trade over the past 120 days, as basically these are the only growths available in any volume. This will continue for another month to six weeks.

The Chinese reserve sale supposedly ends September 30. It will not be restarted until about March 1, 2017. The sale has taken some 12-plus million bales of cotton off the Chinese market and relieved about one third of the world’s over capacity stocks situation. Yet, the Chinese market remains much more volatile than the New York ICE, and this volatility does flow over into New York futures.

One should expect higher than normal price volatility to continue throughout the remainder of the harvesting season. Growers should take advantage of pricing situations on any trade above 70 cents, basis December. The market can stand December in the low 70s. However, prices above 72 cents will create additional demand deterioration.

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