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Cleveland: “Stuck in the Mud” Market Remains Tiresome

The cotton market continued to drift lower early in the week, but was successful in climbing back near the 62.50 mark going into the weekly close.

Mill buying, coupled with additional negative crop reports from India and Brazil, supported the market. However, the increased planted acreage in Australia was rewarded by very timely rains. Yet, it remains difficult to suggest that fundamentals had a notable impact on price activity. More importantly, the demand side of the price equation continued its 18-month bout with sleeping sickness.

Therein lies the problem, and you have already voiced that you do not wish to hear more from me on that subject, at least for now. Thus, one must be content to believe, as I do, that the current price slide has found a bottom, that a slight bit of stability has surfaced, and that the 61 cent mark will hold. While I had thought the bottom was a couple of cents higher, we do know that the 61 cent mark has held far more often than not.

Nevertheless, for the past month I have not been able to clear my thoughts of the old adage “Short Crops Have Long Tails” (that is, after the harvest of a smaller-than-expected crop, the market tends to trend lower and/or remain essentially flat.). If that magic works this year, then we are in for a disappointing spring from a price perspective.

Yes, I know I am the one that is supposed to be able to tell you if that will be the case or not. While all evidence points to it, my emotions (and those things cause one to lose) just point me toward higher prices. Maybe I simply cannot understand why Nero fiddles.

Nevertheless, cotton fundamentals do come into play. We do not teach Economics 101 for nothing. The market has seen a tightening/strengthening of the basis the last seven days, and likely that is the reason for the current price stability.

Net U.S. export sales for the week included 194,600 RB of Upland and 10,500 RB of Pima – a very pleasing report. The sales were marginally higher than expectations. While Turkey led the group of buyers, Vietnam – the usual top buyer – was not in the mix. However, Vietnam mills were active with fixations during the week. Sales, along with the strong fixations by numerous mills, helped establish the price support at 61 cents.

Nevertheless, establishing and holding a bottom is far from a market turnaround, and this market looks much more like just holding a bottom rather than turning around.

Maybe I should just be happy with not going lower. Yet, that fresh air off the Canadian Rockies I wished for last week dumped snow and 20 degree weather on me. I suppose we finally had a few harmful insects killed, at least.

Funds have exited the cotton market in a big way since mid-December, and hindsight suggests that should be viewed as potentially positive in that the market held the 61-63 cent level as well as it did. Additionally, last week’s move to the downside, coupled with this week’s regaining of lost ground, was accompanied with an increased level in open interest. Typically, that can be viewed as positive. But as of late, the more accurate indicator has been to keep open interest somewhat stable – which in itself represents market stability given today’s general trading patterns.

Additionally, the outside markets were a bit more positive this week, and that was definitely to cotton’s benefit.

The aforementioned improved basis position brought about more mill fixations and brought about lifting short hedges. With hedge pressure now at a near minimal, there is little pressure to the downside, and mills appear to voting their cash positions likewise. Again, this is not an indication of increased demand, but rather the mills’ decision that the market is “looking” like a bottom.

The Indian government, as well as industry participants, continue to hold the Indian crop between 26 and 26.75 million bales, below the USDA estimate of 28 million. Given the traditional Indian harvesting period extends well into February, USDA is not expected to lower its estimate until March. However, it is not so much that the raw cotton is not there, but, rather due to the extensive and severe drought, harvesting of all of the land area has essentially been completed.

You deserve better, but all I can foretell is that this market is stuck in the mud. Look for improvements in the basis. Yet, this “stuck in the mud” attitude is beginning to tell me that 2016 cotton plantings may fall to only 8.9 million acres – 400,000 below my earlier estimate and 200,000 below the Beltwide estimate. The lack of a cotton program may prove to be deadly for the economic health of the U.S. cotton industry.

In the meantime, give a gift of cotton.

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