Cleveland: Cotton Dips on Bearish Fundamentals

The dog days of August finally hit the cotton market as activity was limited during the week, and trading volume declined with each passing day. The bearish USDA August supply demand report continues to hold a tight grip on price activity as the 76-cent trades of last week became 72-cent trades this week. 

The overwhelming global supply of cotton will continue to be the focus of the market, followed closely by the failing monsoon in India and then the mixed signals of what appears to be an improving demand. Last week’s higher prices did not slow sales of raw cotton as U.S. export sales were very positive. Additionally, while this week’s trading range was confined to generally 200 points, export sales this week were positive and the market ended the week with very positive trading. 

The failure of the Indian monsoon is the primary bullish fundamental in the market, and as discussed last week, there is very high probability that the potential 23-25 million bale Indian crop has now shrunk to 20.5 to 22.5 million bales. Therefore, India will be a net importer of cotton during the current season. As a result country prices within India have been in the 87- to 92-cent range.

Recall, while India is the world’s second biggest cotton producing nation, its domestic textile industry is also the second biggest in the world. Thus, this season’s significant production shortfall will continue to keep upward pressure on cotton prices. In fact,Indiawill likely import between three and four million bales during the 2012-13 marketing year.

While the December ICE contract is set for a challenge of 80 cents, cooperative and other grower hedging will become very active on a scale up-basis in the 74.50 cent area and above.  This will keep pressure on price rallies, but a successful challenge of the 76.50-cent area should bring speculative funds back to cotton in a big way. The market will need this activity to grind through grower selling.

On call sales volume is very evenly matched, with call purchases suggesting that both sides are in position to fix prices on a moment’s notice. Again, the Indian crop situation suggests a price rally should be forthcoming, but it will have to clear a significant amount of cooperative grower hedging.

Last week’s higher prices failed to slow export sales, as net sales of Upland totaled 77,800 RB and Pima sales were 15,800 RB. Weekly export shipments were 122,900 RB of Upland and 11,800 RB of Pima. 

December futures, while falling to near 72 cents on the week, moved higher on Friday as its fight to climb back to the 75-76 cent level is ongoing.