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Market is Scrambling for Quality Cotton

Cotton prices found support all week from a combination of managed fund short covering, purchases by index funds, excellent export sales and shipments – plus a positive technical signal.

The short covering, particularly coming from the large Chinese speculative who had been big sellers below 58 cents, read the writing on the wall, realized they were far overextended and were forced into short covering before the listing ship finally sunk. Strong export sales and bids were the talk each evening.

Also, the market continued its diligent search for quality cotton.

In spite of rising futures prices, the cash basis for quality continued to rise. U.S. 2014 old crop is selling out faster than anyone expected, and the market is anticipating that USDA will offer these reflections in its February 10 supply demand report. Cotton in California’s San Joaquin Valley is spoken for, and Memphis/Eastern is selling much faster than expected.

The cotton market is anticipating lower world and U.S. carryover, increased world consumption and increased U.S. exports in the USDA announcement. Adding to these market expectations, the stage is set for the world cotton planted area to be somewhat reduced from what had been expected just two months ago.

The long term 57 cent support did hold after all, and world cotton prices can now begin a very slow increase back toward the 65/66 cent level, and then mount a challenge of 70 cents.

U.S. export sales continued at a near record pace, falling just short of last week’s record performance. Net weekly sales were 422,800 RB of Upland and 8,100 RB of Pima. Nevertheless, the past five weeks have seen some 2.0 million bales of U.S. cotton sold for delivery before August 1 this year.

Additionally, 29,800 bales were sold this week for 2015-16 delivery. Thus, the expectation is high that USDA will increase its estimate of U.S. exports in the February supply demand report. While this has been a major concern for me all year, I finally believe USDA must increase its estimate.

It now appears that sales will surpass my earlier idea of 10.2 million bales and be closer to 10.5 million. Export shipments continued the strong five-week run, adding a marketing year weekly high of 271,800 RB of Upland and 2,100 RB of Pima. The primary buyers on the week were Vietnam and China with over 300,000 bales combined, along with South Korea, Taiwan and Japan. Primary shipment destinations were China, Vietnam, Turkey, Indonesia and South Korea. Cotton consumption is simply exploding in Vietnam.

U.S. growers were very active sellers, as The Seam recorded a record volume trading day, and daily sales were very aggressive. Yet, prices have still moved higher in spite of grower sales – an indication of the volume of managed funds shorts that had to be liquidated. Growers appear likely to be willing to feed this market as it moves higher.

The 62.50-63.00 cent mark will offer heavy resistance. I expect to see that price resistance level penetrated in the near term, but possibly we will see a pause, a drop back to just below 60 cents, and then another strong resurgence.

Likely, some readers are tiring of my comments regarding quality cotton. But, the market itself is plowing new territory each and every week as mills search for cotton. Granted, many cannot see the forest for the trees, but a substantial quantity of the huge Chinese carryover will likely never see a spinning mill – or at least not one that spins yarn for a competitive market.

Just how desperate are buyers to locate quality?

Australian and Brazilian cotton production is sometimes referred to as the counter-cyclical crop, being that they are produced in the Southern Hemisphere. Their 2014 crops are just near harvest, and the 2014 Australia crop is already sold out. The 2015 crop, which will be planted in late November/December 2015, has all but sold out at a price of $500 per bale (Australian growers generally make money at $400 per bale).

Merchants came in this week attempting to buy the 2016 crop – a crop that will not be harvested until the early summer of 2017, again for $500 per bale. There is even some buying of the 2018 crop. And, in another indication of the value of quality, U.S. West Coast cotton is currently selling for 125 to 135 cents per pound.

The American seed companies have now provided growers with high yielding varieties having those fiber qualities that mills request, and that offer a premium. This is a great time to be in the cotton business.

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