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Market Faces Long and Crooked Row to Higher Prices

Cotton prices were back and forth this past week, but ended the February 12 session on a positive note, near the 62.50 cent mark. Prices have run into resistance at this level and could likely slip back to near 60.00 to 60.50 cents before mounting another charge.

There were three cotton specific reports, as well as the monthly consumer retail sales report. The market remains short term bullish, but will continue to come under pressure with small advances higher. The next two months is expected to see a preponderance of back and fill price activity.

The National Cotton Council (NCC) annual planting intentions report indicated that U.S. growers would plant some 9.4 million acres in 2015, down 15 percent from the prior year. Plantings were 11 million acres in 2014. Upland intentions are 9.2 million acres – down 15 percent from 2014 – and Pima intentions of 236,000 acres represent a 23 percent increase. The plantings portend a total cotton crop of 13.3 to 14.0 million bales.

If U.S exports and domestic cotton consumption remain unchanged in 2015-16, then U.S. carryover stocks could possibly fall as low as 3.2 million bales, thus setting up a scenario for 10 to 15 cent higher cotton prices than current levels.

Significant reductions were expected for the Southwest – down 876,000 acres, including 857,000 acres in Texas. In the Mid-South, intentions were down 30 percent, with plantings falling to only 1.1 million acres compared to 1.5 million last year. In a significant surprise, grower intentions in Arkansas and Tennessee were down 39 and 35 percent, respectively.

The decline for plantings in others states of the Mid-South were down only some 14 to 22 percent. Mississippi, with planting intentions of 368,000 acres, was the only Mid-South state expected to plant more than 205,000 acres. Other states in the region ranged from a low of 140,000 acres in Louisiana to a high of 203,000 acres in Arkansas.

Southeast growers reported expected plantings to decline 11 percent, much as was expected. Southeast region plantings were expected to be 2.4 million acres, down from 2.7 million in 2014. Georgia accounts for 53 percent of the Southeast acreage, coming in with 1.3 million acres.

The report paints amazing changes in the recent transition from cotton to other crops. While all these changes will not be permanent, they do nevertheless point to a massive change in row crop infrastructure. The Southwest, due to limited cropping alternatives, has been and will continue to be dominated by one crop – cotton.

However, the West region, with nearly unlimited cropping alternatives, has seen the most significant transition from cotton to other alternatives. Planting intentions suggest Upland cotton acreage will total only 134,000 acres in 2015, down 47 percent from 2014. Arizona Upland plantings were estimated at only 59,000 acres, with California plantings of only 35,000 acres of Upland. In 2000, if you recall, California Upland plantings were 660,000 acres.

Only one state with cotton production will have fewer acres than California. That would be Kansas, with only 26,000 acres.

The USDA released its February supply demand report this past week. The report was little changed in total, but two changes were noted in particular. U.S. exports were increased a huge 700,000 bales and were estimated at 10.7 million bales. In a surprise, USDA lowered U.S. consumption 150,000 bales – a major surprise, but not fundamentally important. Chinese consumption was lowered one million bales and will likely have to be lowered as much as another 500,000 bales.

This speaks of declining cotton consumption in China, but not in the world, as cotton yarn imports are flowing into China in record numbers. Yarn imports in January were up six percent over December and 22 percent above the January year ago level. Thus, the declining spinning activity has been more than offset by increased yarn imports to China. This was not surprising, and the trend will continue as China reduces cotton plantings.

Weekly export sales, after six very excellent weeks, were trimmed considerably in response to cotton prices climbing back above 61 cents. Net sales of Upland were only 52,000 bales, but the two primary buyers were China and Vietnam. Yet, cotton shipments set another yearly high on the week, as 289,700 RB were loaded. The longshoreman strike on the West Coast has not yet been settled as had been expected. The parties had initially agreed, but the signatures were not penned. There are likely some 130,000 to 180,000 bales needing to be shipped, but waiting for containers.

The market has a very long and crooked row to hoe on its path to higher prices. However, it is sending multiple signals that the 57 cent resistance level did hold, and prices can now begin to ease higher. For those growers holding physical cotton, cotton prices are expected to nearly cover carrying charges out to July. Yet, quality is commanding an even higher premium than a month ago. Thus, the price for such cotton is almost assured to move higher.

The market could, itself, cover carrying charges. But the better way to handle that, if such is your intention, is to sell the physical cotton and purchase a 300 to 400 point out of the money July call. The basis for Middlings and Strict Middlings will continue to move higher.

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