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Unchanged Variables Keep Market Moving Nowhere Fast

Unchanged Variables Keep Market Moving Nowhere Fast

It’s the lull before the storm.

The cotton market is going nowhere fast. Fundamentals are unchanged. Prices are unchanged. The uncertainty of China is unchanged. The Coastal Bend swamp is unchanged. Mills continue to meet all their needs buying hand-to-mouth. Weather is unchanged.

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Nothing will change until Mother Nature makes her decisions.

The planting and post emergence continues in the Northern Hemisphere, and Mother Nature keeps her powder dry – probably far too dry for India. Too, much of the Mid-South is begging for a rain. It is not that they need rain, but that they want it in order to develop that “perfect crop.” Cotton weather has arrived, hot and muggy, but then cotton acreage is slim in the Mid-South and Southeast, excepting Georgia.

Texas is the key, as if you do not already know that. If Mother Nature keeps pouring on the water as the weatherman predicts, then a huge crop will be in the making. However, that same weatherman says the rains will occur during harvest as well.

So much for today’s weather. The cotton market wants to know tomorrow’s weather. In the meantime, the trading range will continue.

While I had envisioned that December had established a two cent higher support level at 64 cents, this past week’s trading said otherwise. The lower 62.50 to 63.50 support line came into play again, as it was challenged twice. Thus, the long-lived six cent 62-68 cent trading range remains in play as the market awaits new fundamentals.

The Indian monsoon continues slow, weak and late. Yet there is hope as long as it continues, and it does. Local Chinese mills will be able to purchase a controlled/limited amount of cotton from the reserves stocks. However, it will all be for coarse count yarn (32s and below) and will not substitute, to any degree, for the high count yarns that the Chinese downstream mills require.

Thus, the U.S., Australian and Brazilian cotton will remain in high demand for all Asian mills. The Chinese inventory is simply void of high quality cotton.

In the meantime, the futures market is still attempting to bridge its way from the expiry of the July contract to the new crop December. The market and prices are in the hands of the certificated stocks because of the threat of delivery. Given that the vast majority of the certificated stocks are high grade, short staple and out of the premium mic range, prices are very reluctant to move out of the 63-64 cent range.

With cert stocks approaching 200,000 bales – and each and every one of them unfit for any U.S. mill – the market is left to muddle along with no place to go. The cert stocks will eventually be exported, but not at the futures market price. Taking possession of cotton via delivery of the cert stocks only puts the owner deeper in the hole. That is, the market is saying “I do not want any of that cotton, let the owner beware”, in that carrying charges are not reflected in the price differentials.

Basically, the market is saying that it will cost you money to own the cert stocks. Thus, hand-to-mouth buying is all any mill needs to risk for now.

The pace of U.S. export sales and shipments continues upbeat and supportive of the market. Too, USDA will have to increase its export number to 11.0 million bales. Yet as of June 19, nothing has changed. Prices are some 200 points lower, but nothing has changed with respect to supply and demand since the 2015 year began.