Cleveland: Indian Monsoon Sets Stage for Price Rally
August 28, 2012 The current rally will continue to fight for higher ground, but the closer it gets to 80 cents the rougher the road will become until more is known about the Indian and U.S. crops. Nevertheless, after four days of surging prices the market closed below 76 cents (75.21 cents) on Friday as both fundamental and outside factors worked prices lower on the close.
Global economic recovery concerns hit all markets as the European debt calamity resurfaced and funds reduced weekend positions. Cotton prices had surged this week on the reality of a significantly lower Indian crop, earlier thought to be as low as 20.5 million bales, and now suggested by some in India to possibly be as low as 19.5 million bales. India, in the midst of a 100-150 year monsoon failure, holds the key to any price rally above 80 cents.
Additionally, the crop in the Southwest region of the U.S., while improved from last year, is still very much being choked by the U.S. drought that is also impacting the northern part of the Mid-South region. Further, the Southeastern crop has already had too much moisture on open bolls and is facing Hurricane Isaac in the coming week. Additionally, as warned last week, grower hedging (referred to as “origin selling”) was very active on the rally, thus every price uptick was met with the selling of futures by grower and grower cooperatives.
The global drought problems, accompanied by new Chinese import quotas (government allowing mills to purchase cotton on the world market) has set the stage for a strong export year for U.S. cotton, especially now that Indian exports will be scarce. Weekly net export sales of Upland cotton for the 2012-13 marketing year (week ending August 16) were 82,500 RB. As in most weeks, China was the primary buyer with 39,100 RB. Net sales for the 2013-14 marketing year were 11,600 RB. Exports of Upland were 135,200 RB, again primarily to China (35,000 RB). Net Pima sales were 5,400 RB. Net sales of 4,300 RB for delivery in the 2013-14 marketing year were reported for China. Weekly Pima shipments were 9,900 RB. Too, the demand side of the price equation was bolstered by a solid increase in U.S. housing starts.
The price rally toward 80 cents has not shut off the export spigot, nor should it. With the less developed Asian and Sub-Continent countries taking spinning business from China, the export numbers will begin to reflect increased sales to those countries. Yet, without question, China will remain the world’s leading textile producer. However, as previously noted India will close that gap more and more.
The short and intermediate term trend is up with grower hedging scheduled at 77 cents, 79 cents and 81 cents. Technically, the long term outlook remains bearish, but does not reflect the soybean-cotton and corn-cotton price ratios for the coming season. U.S. cotton plantings in 2013 had been thought to be a minimum of 9.5 million acres, but have now been lowered to 9.0 million bales due to the exceptionally strong price ratios that favor planting grain and oilseed crops at the expense of cotton. Thus, the world bearish supply excess is rapidly disappearing. The front line of support lies at 73 cents and again at 72 cents. Failure to hold 72 cents would set the stage for a bear party. Friday’s activity moved the market from overbought to neutral, thus setting the stage for another price rally.
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