Cleveland: Bulls Appear in the Cotton Market

By Jim.Robinson|December 19, 2012

Sometimes it is more fun than others to write this newsletter. Today is one of the fun times. Something happened and cotton was the talk of the commodity markets this week. Speculators even joined in with their money, helping push prices higher. Further, the weekly close, above 75 cents (75.09), will light a bullish fire under the market’s analytical community and calls for 80/82 cents will ring out. But before I get too excited – it is not like I am on a Hawaiian vacation – let me just reflect that the long term nine/ten cent trading range between 69 and 78 cents is still in play. Look for the nine/ten cent range to hold and on any approach of 77 cents growers should fix the price of more production. My July call for 82-85 cents will wilt on any vine that dares touch the 80-cent mark, and that is most likely far too lofty of a goal.

Last week’s newsletter called for USDA to lower world carryover and increase U.S. exports. In their Tuesday release of its December supply demand report, USDA took that a couple steps further and decreased both U.S. production and carryover, topping it off with ice cream by adding a bit of increase in world consumption. More sweet deserts will follow later in the marketing year as Indian stock reductions will bring down world carryover and USDA continues to increase its estimate of world consumption. Too, foreign production will work itself a bit lower. Of course, consumption is somewhat tied to whether the U.S. Congress decides to end its strike, and begin earning their government checks. Otherwise there is legitimate fear that world consumption will gradually begin to slow.

While the market was happy to see USDA lower world carryover below 80 million bales (79.6 million) it was more excited to see USDA finally buy in to the realization that world consumption is increasing, USDA “recognized” consumption in a variety of ways, most importantly by increasing its estimate of world trade (imports/exports) by 1.1 million bales and specifically listing China, India, and Vietnam as the primary reason. Note too, that Turkish consumption is also supporting the argument for increased world consumption. India is on a path to double the level of Chinese consumption, but that could still be as much as ten to fifteen years away.

U.S. export sales, as evidenced by USDA, are most impressive. In the past five plus weeks the U.S. has sold almost 2.5 million bales of cotton, including Upland, Pima and sales for 2013/14; a staggering amount, well spread among some 20 countries.

Yet China holds near half the world’s 79 million bale carryover and they continue to buy new crop Chinese cotton to add to their strategic reserve, buying directly from Chinese growers for near $1.41 per pound. Thus, don’t expect China to dump cotton on the market. The New York ICE is well supported in the 70 cent plus range by this action, as is the world price of cotton. Don’t sell your cotton pickers, but I cannot justify today’s price above 78-82 cents per pound.