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Cleveland: Prices Seek New Floor Ahead of USDA Reports

Since sailing up to 68.11 cents on July 2, cotton futures moved south the remainder of the month and continued that pattern through the first week in August.

The latest December contract – after being down triple digits on August 6 as prices touched managed fund sell stops – broke below the long term 62.50 to 63.00 cent support level and then fell another 47 points on the weekly closing, settling at 61.79 cents.

The next supports lies near 61 cents, and then down to 58 cents.

We had long held that the 62 to 63 cent support would hold, but the market corrected us once again. We are reminded that all but one speaker at the recent New York Cotton Forum, sponsored by ICE and Cotton Incorporated, felt the 63-cent support level would hold. The one outlier was the Informa analyst that allowed for a quick, short-lived price drop to 56 to 58 cents. He may prove to be best soothsayer yet, as the market looks to be facing severe stress.

But then, the skies may be ready to brighten. If the market does move to the high 50s, such activity should be very short lived as it will not uncover any grower selling. In fact, the trade should be expected to defend the market at current levels. Such a scenario would allow for a price increase – albeit only a few cents.

Managed funds liquidated a solid chunk of longs this past week, and the grains seemingly have found some life after a month-long dive. That should be viewed as supportive for cotton prices.

Fundamental news will abound as the USDA August supply demand report will be released on August 12. The report will include a modified/updated USDA plantings estimate, an expected updated harvested acreage estimate, and the first objective crop survey of the year. Additionally, we will get USDA’s new take on U.S. exports, expected to be some 235,000 bales higher than the July estimate and dropping U.S. carryover down to 3.9 million bales.

The U.S. crop size is expected to be unchanged unless the revised harvested acreage is lower than expected. The report is not expected to be bearish. But it could be little more than neutral, as USDA may decide it wants to learn more of crop development around the globe. Nevertheless, the market is currently acting as if it wants to move slightly lower as harvest approaches – even though more than 95 percent of the harvesting is months away.

Harvesting has begun in the lower Rio Grande and easing up to the Southern Bend of Texas. However, those areas, as well the Northern Bend, have only limited acreage, and yields are also expected to be weak. Yet, it should be noted that little of that cotton is committed, and the vast majority of the production is expected to go in the CCC loan program.

Since August 1 – the date of the cotton yield objective survey – the U.S. crop has slipped backward according to USDA weekly reports. Of course, we will get another weekly report before the latest world supply demand report, so the yield survey will be somewhat dated by two full weeks. Thus, the USDA report will tend to overestimate the size of the U.S. crop. However, any overestimation – if there is any – will be slight.

Said differently, there is still potentially almost the “entire growing season in front of this crop.”

Personally, I feel the U.S. crop is 500,000 bales below the USDA estimate, and that 2015-16 exports should be increased to 400,000 to 500,000 bales. Additionally, the U.S. ending stocks for July 31, 2016 will eventually be lowered nearly one million bales below the current estimate. Likewise, the potentially record-setting Indian crop is slipping backward and will not be as large as the 2014 crop.

While the Indian monsoon has improved, there remain vast areas of cotton that have either received little moisture or less than half the moisture typically received by now. Granted, the monsoon season has another two months to go, which, with a very open fall, would allow for more cotton output.

The current weakness in the cotton market should be short lived, as growers do not have any incentive to price at current levels. A resurgence back to the 65 cent area should be expected.

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