News of the Indian government’s plan to keep more of the country’s cotton in country for domestic use shot prices higher on Monday, and the market was able to hold about half of that 250-plus point leap all week.
The news sent Indian prices higher and positioned the U.S. as the most competitive crop available on the world market – both ideas that sent the cotton bulls to the Board on a buying spree. Open interest moved higher for the first time in several weeks, and talk of a test above 71 cents was revived.
Additionally, a potential freeze in West Texas hovered over the market most of the week. Initial ideas from cotton meteorologists called for only the very northern end of District 1N to be affected, but more recent data suggests the freeze may be both more severe and affect more acres than previously suggested. Nevertheless, the market appears to be waiting for more definitive activity before moving in any direction. Yet, the 65-70 trading range will continue to hold, with an upward bias.
Cotton’s potential for higher prices has been discounted on numerous occasions the past three months. Yet, big crops and even bigger crops have, to date, met the same fate – a firm line of price support. Prices simply have not demonstrated any desire to move below 65 cents, basis December.
World demand has eased higher for the past three years and has enjoyed a greater surge the past six months. As such, world carryover has fallen 20 million bales since the 2015-16 cotton marketing season. World consumption has increased 8 million bales over this period. It is this combination of declining carryover and stronger demand that will continue to offer long-term price support. In fact, cotton demand is expected to continue a strong growth pattern for the next several years.
It is likely that world carryover will fall below 89 million bales during the current 2017-18 marketing season. More importantly, the market is preparing for the 2019-20 marketing season when the domestic supply of Chinese cotton will have fallen to a level such that China will again become an aggressive importer on the world market.
USDA’s crop enumerators will be in the fields over the weekend and early in the week as they collect data for the November crop production estimate. The current season will continue to confound the estimates, as the crop has already faced three hurricanes and now is seeing an early freeze in the Southwest. Too, as was the case with much of the hurricane timing, the freeze is occurring during a survey period, delaying any reporting calculations until the following month.
The U.S. crop, currently estimated at 21.1 million bales, is fast on its way to falling to no more than 20.5 million. Too, export sales were revived this week as net upland sales jumped 289,100 RB (a marketing year high), and Pima sales were 16,200 RB. While sales are impressive, and even some 2.7 million bales ahead of last year’s pace, actual shipments are trailing the prior year’s pace by almost 300,000 bales. However, it is not unusual for first quarter shipments to lag.
Mills were very aggressive with fixations on the week, suggesting their nervousness about price activity. On-call sales did not advance on the week, but only because mill fixations were so large. Thus, on-call sales will continue to support prices.
Price bias is higher, but growers should not expect any rally beyond 300-400 points. The trading range will continue at 65-70 cents, with a shot at 71 cents.
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