Cleveland: Fundamentals Still Supporting the Market
January 18, 2011 By Dr. O. A. Cleveland
Professor Emeritus, Mississippi State University
For Bayer CropScience
Last week’s release of the January USDA world supply/demand report for cotton held few changes in the world fundamental data, although world ending stocks were lowered 550,000 bales. This could have been interpreted as slightly bullish, but more appropriately, should have been held to be simply supportive to the market. For the second consecutive month the report did not have any surprises and was in line with expectations. Yet, world ending stocks have fallen the past two months, and taken together, the last two reports have benefited the bullish side of the price equation. This is no time to become bearish, despite the fact that cotton prices continue to trade in the upper fifteen percent of the historical high range.
Several weeks back, I commented on why cotton prices would not go down. That article may bear repeating, but for now let’s just say that the price for cotton must — and will —remain competitive with the grain/oilseed complex. Bank on it!
The USDA January report left the U.S. fundamentals essentially unchanged, the only change being a 50,000-bale increase in U.S. production. Production is now estimated at 18.32 million bales. Carryover is forecast at 1.9 million bales, but will decrease as much as 500,000 to 600,000 bales unless old crop prices jump to new highs. Domestic use was projected at 3.6 million bales while exports were estimated at 15.75 million.
World cotton production was lowered 70,000 bales and world consumption was increased 330,000 bales. This combination world lower USDA’s forecast of world ending stocks down to 42.84 million bales, or 330,000 bales lower than the December forecast. India, China and Australia production were unchanged from the prior month, and Brazilian production was increased 100,000 bales, and it now estimated at 8.2 million bales. It is likely that world stocks will be worked yet lower during the season, possibly down as much as 500,000 bales lower.
You may recall that in September I commented almost weekly that the on-call sales report (futures contracts that mills must, at some later date, must fix the price). Recall as well that this means the buying of futures contracts. As early as August the report was suggesting the market was very bullish for December prices. The same situation exists today for the March, May and July contracts. March, being the lead contract is the most bullish, but as March expires the baton will be passed to May; and likewise, as May expires the baton will be passed to the July contract. That is, old crop prices will continue to hold the 130 to 165 cent range.
December established new contract highs this week as prices climbed above 105 cents. December will likely find benefit from the on call sales report, yet is it not established in the fundamental data yet. Additionally December is finding support from in the export market in that for the third consecutive week, new crop export sales (sales for the 2011-12 marketing year) exceeded export sales for the current marketing year (2010-11).
Speculative funds continue to support the commodity markets, but their interest in placing new money in commodities is waning. Nevertheless, this bull remains extremely healthy and will for some time.
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