Cleveland: No Moral Victories in the Market
March 7, 2016 Cotton prices fell to the 54-55 cent level this past week, completing its 5 cent drop below 60 cents. The market experienced what may prove to be a blowout bottom before recovering at week’s end with consecutive days of higher prices.
It is too early to declare a blowout bottom, but most of the classic requirements were met. The most promising was that the market immediately bounced higher off its limit down move. Nevertheless, with major losses on the day, open interest surged higher, noting that new speculative shorts had entered the market. These shorts will have to be washed out before any upward movement can be validated.
For now, the market appears to be content with trading just below the price break near 58 cents. All monthly New York ICE contracts from the old crop May through the new crop December were hovering just above the 57-cent mark. Thus, weekly losses were limited to only about 50 points.
The temptation was to view this as a moral victory. The market is famous for giving second chances, but it also takes no prisoners. We are not talking horseshoes here.
In that light, it was noted that one excellent market advisor suggested buying December calls above 58 cents, while another with a large following suggested buying December puts at 58 cents. Two views, opposite market directions. One can build a case to support either view.
However, the typical blowout bottom is soon accompanied by an outside range trading day. This is typified by a daily trading range that is higher than the prior day’s high and lower than the prior day’s low, with a close that is higher than the prior day’s close. It sounds like gobbledygook, but can be so telling and so accurate. It is a measure of the trading population’s emotions and financial opinion, and it is the signal that traders would like to see (or not see) before exiting the market or potentially adding more short positions.
The market also digested USDA’s forecast of a 14.1 million bale crop on 9.4 million planted acres in 2016. While our plantings estimate had been identical, with the Beltwide estimate and the NCC plantings survey both 9.1 million acres, we had, over the past month, backed our estimate down to 8.9 million acres.
Yet, it is difficult not to accept the 9.1-9.4 million acres plantings estimates. Growers want to plant more cotton. They have voiced it verbally and in every survey. They site improved yields, improved quality (both due to the seed company research), as well as lower grain and oilseed prices. The corn/cotton growers remain very fond of the rotation.
In response to planting more soybeans, many farmers respond that they may likely switch some soybean land to grain sorghum – a tell-tale signal that soybeans, even at $8.75, are out of favor with an increasing number of growers (note: irrigated land capable of harvesting 60 bushels and up will still draw soybeans).
Cotton, however, offers little in the way of profits for growers that face land charges, as well as custom harvest expenses. Yet, growers with both ginning and warehouse interest still find that the market will more than cover expenses, albeit mostly only slightly better than a push.
Additionally, Mid-South and Southeastern U.S growers continue to be attracted to 13 cent equity offers for 2016 crop. As noted numerous times, Southwest growers are all but locked into cotton. Nevertheless, it is at best difficult to plant cotton under cost management conditions.
The sharp drawdown in quality stocks offers underlying price support, more so for U.S. crop than for Australian and Brazilian. The cash basis in Brazil and Australia for high quality is only about half of what is was at this time last season. The cash basis for U.S. high quality has held equal to 2015 levels.
It does appear that China will continue to purchase high quality cotton, but only on a very limited scale. Nevertheless, the weight of the Chinese disposal still sits on the top of this market. Prices remain range bound to slightly lower. World cotton prices are now some 10 cents higher than chemical fibers. That will bode well for cotton, but not until cotton demand can be uncovered. To date, the recent sell-off in market prices has not attracted new demand.
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