Weather Worries Put Cotton Market on the Defensive
Cotton prices were on the defensive all week, despite the fact that few, if any, bearish fundamentals surfaced. Actually, the new fundamental uncovered during the week was laced with bullish overtones.
With delayed plantings across the U.S., unfavorable rains on open Australian cotton, more news from both China and Brazil that planted area is coming in under earlier forecasts, to widespread hail across China’s major cotton producing region, Xinjiang, the market seemed to trade in reverse correlation with the U.S. dollar. Thus, as the dollar spent most of the week trading higher, the cotton worked lower.
However, going into the week’s last trading hours, the soon-to-be history July contract was holding at 64 cents. The new crop December was holding at 65 cents. Thus, it appears the July contract will move into expiry with its nine-month trading range in force.
While it is only the rare prognosticator that even dares to suggest that the December contract would make new lows, the call for prices in the upper 60s, likewise draws few supporters. Yet, there is a bias for higher prices for the new crop. Too, the aforementioned bullish news that surfaced this week is suggestive of higher prices, notwithstanding it remains very early to kill the crop in the market just yet. That is, we are just in the middle of the Northern Hemisphere planting season.
The nine-month trading range was referred to last week as a mouse in a maze (email@example.com). Thus, the question becomes whether the mouse can find the exit before he succumbs to the elements.
Mother Nature holds the key, and we are getting close to the short rows in that. Weather-related crop developments are ongoing in the three largest producing countries, as well as all the major exporting countries.
Should the flooding in Texas come to an end this week, and the remainder of the season be blessed with excellent cotton weather, then Texas could produce a bumper crop. However, given the loss of cotton acreage in Texas to water and grain prices, then cotton could move to the mid-70s. While the bet is still on that the big cotton production areas of Texas 1-N and 1-S will be BIG, the other parts of the state are generally in trouble.
Further, across the U.S., some four bale cotton ground will be lost in California, as growers opt to sell their water rights for this year alone for $1,000 per acre foot. Too, other regions are thought to have lost as much as 30,000 Upland acres to Pima just at planting.
Most analysts are carrying a Chinese production estimate two million bales below the USDA number. True, India could still go either way, but the rainmakers are suggesting troubling signs for the Indian monsoon. This was the case last year, but most failed to recognize it until harvesting of the Indian crop began, and yields proved to be much weaker that thought. It is setting up the same way again this year.
U.S. exports continue to provide solid support, and more analysts are finally speaking in terms of exports exceeding the USDA estimate of 10.7 million bales by 300,000 to 400,000 bales. Should that come about, U.S. carryover could fall to 4.0 million bales. Net export sales of Upland for the week totaled 59,300 bales, as 16 countries purchased U.S. cotton. Pima sales were 12,900 bales. Yet, sales for 2015/16 delivery have slowed, but they were 36,200 bales.
The strong news lay in shipments, as 343,300 bales of Upland were exported, and a marketing year record of 18,700 bales of Pima were loaded out. That has both sales and shipments two percent above the five-year average for this time of the year and supports merchant’s ideas of the need to increase the USDA estimate.
The Texas A&M cotton specialist, noting that NOAA has removed all red spots (drought) on the drought monitor in just one week, commented, “The red is gone, the red is gone,” in a fitting tribute to the departed Mississippian, B.B. King.