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Cleveland: Market Weakens as Prices Begin to Slide

After many weeks of building a base above 65 cents, and even seeing a trade back to 70 cents this past week, the market is showing signs of vulnerability.

This past week’s opportunity to fix prices at 70 cents may have been the final one until at least the spring. Cotton appears headed back to 65 cents, basis December, as the Northern Hemisphere harvest moves into full swing and mills will have wide access to 2016 crop cotton come November.

The availability of high quality cotton will continue to be key. But excellent weather conditions have allowed for full development of the top crop, and open harvest conditions from Georgia back west throughout the Mid-South will add to both the quantity and quality of the U.S. crop. This, in turn, will add weight on top of the 65 cent support level currently propping up the market.

Coupled with the weaker than expected U.S. economy, this has convinced a number of fund long money managers to not only take money out of the cotton market, but the other agricultural markets as well. It is the long speculative trader that must be again attracted to the cotton ring if the December contract is to hold the 65 cent level.

The market found excellent support from the Chinese National Reserve sale. But with that on hold until probably March, the market has lost the support of those relatively higher-than-world-market-price sales, and will likely find a tendency to drift lower into the next round of scheduled sales. Nevertheless, current crop Chinese cotton will not enter the world market, as the government will hold all of it for local usage. It is also expected that the speculative money that has been flowing to the Chinese cotton market will now show considerable shrinkage.

The supply side of the price equation will be the dominant market force through December. Thus, with the world crop projected to be slightly larger than forecast last month, the market will be set to drift lower into December.

While cotton consumption in China has increased, the easily available and very cheap (47-48 cents) acid-based polyester exported by China to the world textile industry has driven cotton consumption to its lowest per capita level in history. Too, cotton share of the textile spinning system now is at its lowest level in textile spinning history. The acid-based polyester industry, simply stated, has far exceeded cotton’s ability and willingness to attract consumers. This demand issue will not go away until the cotton industry admits it is simply being out-gunned for the attention of the world’s fiber consumer and begins to refocus on that same consumer.

Look for export sales to be slightly weak, as the Chinese industrial sector was on holiday all last week. However, the most current weekly export report showed total upland sales at a net 158,900 RB and Pima at 23,600 RB. The primary buyers were Vietnam, South Korea and China. Shipments surged ahead, with 212,500 RB of upland and 7,100 RB of Pima. Shipments now stand 600,000 bales ahead of the prior year pace, and sales are nearly 1.3 million bales ahead of the prior year pace.

The big U.S. crop (and getting bigger) is on track to sell 14 million bales in the export market. However, the spinning system simply has too much fiber competition for U.S. cotton exports to enjoy a 14+ million bale export market if the nearby contract moves higher than the 68 cent level.

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