Cotton futures, basis the ICE contracts, gave up all of the prior three weeks gains this past week as the market lost some 200 points. Prices moved from the prior week’s 65.50 cents to some 63.50 cents this week, as most of the tumble came during Thursday and Friday trading.
The market had shown limited weakness since the release of the USDA’s April supply demand report. Recall that USDA failed to increase exports of U.S. cotton by 200,000 bales (or more) as the market had expected. Granted, it was only 200,000 bales out of a total world trade of about 30 million bales. But the perception of a tightness in premium stocks seemed to evaporate from the speculative community’s vigorous support of the market.
On the heels of profit taking by the longs, the USDA weekly export report noted negative sales of Upland cotton, as export cancellations of prior sales overwhelmed new sales. This brought out the bears to feed, and, in two days, they took some 200 points out of the market.
There should be no panic by the bulls as the attempt at higher prices did see plenty of light above the previous trading range high. Actually, the market moved above the 200-day moving average, representing a move higher than most had not expected during the move. Thus, the failure of holding the 65.50 to 66.00 cent mark should not be viewed as a setback for those calling for a return to the 70 area in both and new crop prices.
The tightness does exist, and mills continue to buy hand to mouth. Thus, the market’s move to 66 cents and above saw mills cut off all buying.
While that paints a potential bearish picture, recall it was just a month ago the buying was cut off at 63 cents, and three months ago, buying slowed as the market “climbed” to 59 to 60 cents. Thus, we see that the market continues to see higher and higher lows, generally viewed as the definition of an uptrend.
Too, while the weekly net sales of U.S. cotton were negative, export shipments totaled 216,900 bales. While this was only about half of the yearly high of over 400,000 bales shipped last week, total cotton export commitments now stand at 101 percent of the five year average – and there are 19 more “export weeks” remaining in the 2014-15 marketing year.
We should be careful not to think that the only way for the market to move is down. As discussed, mills withdrew from the market at 65 cents on this move, and subsequent action supported their action. Yet again, they were withdrawing at 59 cents and then at 63 cents. Therefore, while the trading range remains in force, it has stretched its arms to the topside. The 61 cent support still holds. Price action will work the 150 to 250 point range on either side of 63.50 cents.
It is now on the late side of April, and much of the Mid-South region of the U.S. remains waterlogged. Mother Nature’s actions are fast becoming a major fundamental in the market, although there is still time to dry out and allow field work. Too, with acres shrinking in this region, growers will not be stressed for equipment and can get the crop in at a rapid pace. However, widespread areas remain too wet for now. Yet, somehow the crop always gets planted.
Yes, Mother Nature usually kills the crop a time or two before we even see a very good stand of plants. Yet, given the shortage of high quality in both the U.S. and around the globe, the reduction in planted acreage in the Mid-South region potentially opens the door for a stronger than typical seasonal price rally associated with delayed plantings. Additionally, if planting delays occur, it will become the weather that follows that will become critical.