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Cotton Riding a Rosy (but a Bit Scary) Bull Market

Cotton Riding a Rosy (but a Bit Scary) Bull Market

Prices held at the upper end of the trading range most of the week, and, for the first time in several weeks, the market traded a very narrow range. The lack of volatility could suggest the old bull is tiring. But then, a new bull may be emerging.

Certainly the extreme drought in the Southwest continues to feed bullish hopes, but another full month of dry weather will be necessary before anything can be written off. Yes, there are legitimate and grave concerns, but rains by the first week in June would still be billed as “million dollar rains,” if not “billion dollar rains.” Thus, the new crop December still awaits Mother Nature’s decision.

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Other bullish factors are the same – on-call sales positions, booming export shipments and growing world demand.

December futures posted another yearly high close, as traders are carefully positioning themselves for the market to break above 80 cents. Likely, in the absence of rain, the market will post ever higher prices into June. Too, the on-call sales and export business are favoring the outlook for old crop prices on the July futures contract.

It continues to be difficult to predict a 90-cent trade on the July contract, but textile mills continue to be squeezed by their on-call sales position. That – along with the exceptional demand for U.S. cotton and the very aggressive offering prices by U.S. coops and merchants – favors an ever higher demand for U.S. cotton, both the limited amount of high grades and the more readably available low grade, high bark, low micronaire cotton. For the low grades, it has become a situation of “if the price is low enough, it will sell.” Thus, a run at the 90-cent mark on the July futures contract seems more plausible, as prices for U.S. growths are the second lowest in the world market.

In a testament to world cotton demand, the 21-plus million bale 2017 U.S. crop will all but sell out. Even further out into 2019, U.S. cotton export sales are racing well higher than anyone could have expected. New crop – not old crop – on-call sales are in excess of 9.3 million…totally unheard of! With 13½ weeks left in the 2017-18 marketing season (July 31), the backlog of U. S. cotton waiting transportation to overseas mills will not be worked off.

Exports continue to provide favorable support to the market. Nearly three months ago, we suggested that the heavy backlog in U.S. exports would remain, and the market would continue to see very heavy export shipments in the summer months and even into the early fall. It was suggested that such was the reason for the large underestimation by USDA in its export forecast.

The backlog has become even more pronounced. There are now some 2.2-2.4 million bales that have been cleared for shipment, but await the means of being loaded on an outbound vessel. This is a near record backlog of cotton awaiting shipment. That is, all of the necessary financial paperwork and transportation records have been posted, and the cotton is simply waiting on transportation.

Consequently, with each passing week, export shipments should be expected to range between 375,000 to 475,000 bales. Extending the calculation to the end of the marketing year (13½ weeks and accounting for 480 pound bales versus running bales), then exports project to 16.6 million bales. That is a very sizeable 1.6 million bales more than the current USDA estimate. Too, U.S. carryover would be lowered by that amount, and even possibly by another 100,000 bales resulting from improved U.S. domestic consumption. Thus, carryover falls from the current USDA estimate of 5.0 million bales to an astonishing 3.6 million bales.

The marketing year began with 2.75 million bales on hand. Thus, in a year when production exceeded 21 million bales, U.S. carryover potentially will have increased only about one million bales. There are many credits for that, but the U.S. cotton grower, along with the cooperatives and merchants and seed companies, all stand in the credit line.

Export sales for the week were a net of only 189,900 RB for upland and 11.0 million bales of Pima. However, new crop sales totaled 299.1 million bales of upland. Therefore, weekly net sales of all cotton totaled a net of 500,000 bales. That is correct – a full one half million bales of U.S. cotton were sold during the week (the most recent weekly export sales and shipments report can be found online).

Demand, demand, demand. Economics 101: Prices are very rigid to the downside and enjoy movement to the upside during periods of increased demand.

This rosy and bullish picture is a bit scary, especially since nothing has yet to be said about on-call sales. Mills have only some 34 trading days to fix the price of their remaining old crop July on-call sales. That is an adequate amount of time, except, as of the beginning of this week’s trading, mills had slightly more than 5.5 million bales to fix – i.e., more necessary buying of futures than I can ever recall. This week of low market volatility may be giving way to some burning days in the next three weeks. Yet, Mother Nature can still have her say.

New contract highs will be made in the December contract. Yet, given that prices are in the upper one fourth of the historical price range, growers are encouraged to price as much as 35% of their production.

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