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Market Fundamentals Positive, but Not Yet Bullish

By Dr. O.A. Cleveland

After failing to break to the top of the long term trading range, cotton prices pulled back and spent the remainder of the week climbing back to the June 13 high in the 65-66 cent area.

The old crop July contract has a week remaining before going first notice, and certificated stocks have piled up in warehouses waiting for delivery. Thus, July should encounter difficulty holding the 65 cent mark. The new crop December contract is trapped between the bullish crop difficulties in China and India and the bearish big crop scenario forming for the U.S. crop. Thus, the early battle line is marked with production fundamentals.

Of course, China and India are the world’s two largest producers, with the U.S. in third place. Thus, conditions in those two countries bear paramount attention. Yet, the U.S. still holds forth a big stick as the major supplier of global exports and as the world’s principal supplier of high quality cotton.

Too, as noted, the U.S. crop – currently forecast at 14.8 million bales by USDA – is off to a 15+ million bale beginning. Yet, the U.S. crop is building very early heat units, and it is a bit unknown how that could impact a potential big crop. July weather has arrived two weeks early.

Nevertheless, the trading range remains locked in place. However, the speculative influence – impacted by the volatile value of the dollar and continued disappointment with stock values – has created a much more volatile situation for cotton, as well as the world grain and oilseeds markets.

The next month, into the middle of July, will provide much more definition about the U.S. crop size than for either the Indian or Chinese crops. The Indian planting and growing season is much longer than that in the U.S., and the Chinese crop has a tendency to face more adverse weather difficulties earlier in the growing season than does the U.S. crop. The Indian monsoon has arrived, but not with the oomph that was forecast. Nevertheless, much time remains. Granted, some Indian cotton acreage has been lost to other crops, but no more than was expected. Yet, should the monsoon prove weaker than advertised, then more cotton acreage will be lost.

We have written about BCI (Better Cotton Initiative) over the past several months and will continue to do so. BCI is now making a concerted effort to familiarize itself with the U.S. grower. There was never any doubt that U.S. growers and their member organizations (NCC, Farm Bureau and regional grower councils) had very similar goals as BCI.

The Initiative has now recognized that the stewardship and sustainable production practices of the U.S. grower are on par and generally exceed those of other growers. As such, BCI is making a concerted effort to enlist the participation of U.S growers. Actually, if BCI and its members are to meet their stated goals, they had to recognize the sustainable practices of U.S. growers.

I would encourage all U.S. growers to access BCI information with the intent of participating in the certification program. There is a cost involved, but it appears that BCI is working to insure that the cost is fair and that it has a platform to reward the grower.  Do not shy away from the fact that there is “a cost involved.” However, it may well be a “you can pay me now or pay me later” type cost. But, there is a cost.

Nevertheless, the program delves deeply into international socioeconomic actions, and that will be hurdle for some. Yet, the cotton industry has always participated in such endeavors, albeit in a different format. It is a new way of viewing and solving established problems. New is not bad, it is just different. Give BCI and its affiliated certification programs a fair view.

Back to cotton pricing. The technical picture looks promising. However, the 67 cent level continues to offer a significant challenge. Mills, while adjusting their price sights higher, have shied away from pricing above 65 cents. Possibly, as the technical purist would remind us, “technicals are the leading indicator of fundamentals.”

Could it be that the market is trying to tell us that the “falling” dollar, coupled with a rebound in commodity prices, will continue to push cotton prices higher? Not likely – there is a bit too much correlation for that to be true. Yet, cotton continues to run higher with soybeans. Soybeans offer a stronger case for higher prices than cotton, but maybe cotton fundamentals are more bullish than I picture.

Tally up the positive fundamentals, and the only true new factor has been the excellent Chinese Reserve sales. There may be more bullishness there than we have previously credited, as those sales have been at prices higher than expected at in volumes larger than expected. That borders on a diagnosis of increased demand – something cotton has not been fortunate enough to see in several years. Could it be true?

Volatility and its triple-digit trading days are back with us, but it remains difficult to build a case for December futures trading above the 67-68 cent range. Mother Nature can change that.

Give a gift of cotton today.

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