Cleveland: Market on Path to Higher and Higher Lows

Cotton prices bounced back this week in response to the time-honored adage, “low prices cure low prices.”

Once again, the nearby contract demonstrated that the bottom of the market has been reached. With the New York May contract dropping first below 63 cents and then below 62 cents in last week’s trading, textile mills jumped on the bandwagon and made heavy purchases. This demand was uncovered some 100 points higher than had been the case in prior rallies – an indication that the market is now along a path of higher and higher lows.

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There is still a bit more rubber to meet the road, but the tire ruts are pointed one way – up. Nevertheless, there remain a few bumps and curves along the way.

This week’s export report confirmed last week’s rumors of widespread sales, and current rumors have sales projections for next week at an equally high level. Net sales of all cotton were 289,900 bales, including 238,600 Upland and 1,100 Pima for the current year and 50,200 bales for the 2015-16 marketing year. Thus, there have now been two consecutive weeks of significant sales for the 2015-16 year, a very unusual event.

Additionally, current year sales were spread across nineteen countries, representing strong demand for U.S. cotton. Sales at this level have basically accounted for all but a small level of high quality premium cotton. Only the mid-grade cotton remains to be sold, and its sales are lingering somewhat as that cotton must actively compete with similar cotton of other countries.

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The primary buyers this week were China, South Korea, Turkey, Vietnam and Taiwan. Export shipments were also better than expected, given the longshoreman strike. Shipments totaled 296,000 RB of Upland and 15,300 RB of Pima.

Strict Middling and Middling cotton, 1-5/16, premium mic and strength, continues to move higher in the spot market. Sales of SLM 1-1/16 and 1-1/8 lag in the U.S.  Again, the reason is that the Asian mills – while in the market for most grades – have a very keen interest in high quality and are scavenging the globe for it. In that regard, the Chinese did announce this week that the government is reviewing proposals to allow more cotton to be imported. The textile industry, in a nutshell, told the government they need imported quality cotton if they are to operate the spinning mills – i.e., that the strategic reserve cotton cannot be used to produce saleable yarn.

While I can be correctly accused to harping on this most every week, evidence continues to mount that the Chinese will relent and decide it is in their best interest to keep the spinning mills in operation.

While the primary factors pulling prices higher were improved demand for exports and the declining availability of premium quality cotton, other factors also came to cotton’s rescue. The U.S. economy, still in an uptrend, got a further boost this week, causing the dollar to slow its steep climb. In fact, most all commodities received a boost from the Federal Reserve’s action.

The market will continue to challenge the 66 cent level, basis the nearby contract, and then likely retreat back toward the 63 cent level. However, the May and June time period should provide more positive news for growers as the market absorbs the declining plantings of the U.S., China, Brazil and Australia. Yet, the aforementioned 62 to 66 cent level will get most of the work.

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