Cotton futures had a couple of triple digit days this past week, up and down. Yet, the bulls carried the week, if only slightly.
Nevertheless, the bullish side of the fundamental equation still must work from a defensive posture, as long term fundamentals continue to favor pressure on prices. Of course, that includes Mother Nature as a bearish influence on the market – not always a prudent decision. Nevertheless, “typical” weather across the globe does speak to an increased crop size.
This week’s price boost came from a combination of influences: the Monsanto decision to drop Burkina Faso (West Africa) from its customer list, the rapid pace of Chinese sales from its reserve, the market’s first attempt to kill the U.S. crop due to cool, wet weather, and excellent U.S. export sales. Granted, it would be much more exciting and price productive if the market could uncover demand news. But, it is planting season, so supply news must suffice.
The trading range continues. Yet, export sales did blossom with the prior week’s price dip below 62.50 cents. Net sales of U.S. upland cotton rose to 189,400 RB, up some 85 percent from the prior week. Pima sales totaled 11,700 RB. Vietnam, Turkey, China, Pakistan and India were the primary buyers of upland.
China continues to chip away in its hunt to satisfy mill needs to obtain high quality cotton to mix with the low quality domestic stocks on hand. Sales to China include both government and private mill purchases. This suggests China will continue to be seen in the export market, just at a much lower level than in the prior five years. The demand for cotton imports into China will remain solid, but only for high quality.
The presence of Pakistan and India continue to point to the production problems faced by the 2015 crop in both countries. Another positive note for U.S. exports was that mills have viewed 61 cents plus, basis December futures, as a very favorable pricing point for new crop delivery. Some 50,200 RB were purchased for 2016/17 marketing year delivery – well above recent purchases of new crop. Another 4,000 RB of Pima were also sold for 2016/17 delivery.
Continuing our theme that USDA took far too big of a bite out of its export estimate, weekly export shipments totaled 232,900 RB of upland and 12,100 RB of Pima. Vietnamese and Chinese mills were the primary delivery points. Recall our contention that hand-to-mouth buying by mills has changed the delivery needs, and late season shipments will not slow as much as in the past. That is, the immediate need shipments are becoming more of the norm.
Cool, wet weather continues to delay grower planning activity. Yet, planting progress, compared to past seasons, is very much in line with planting date recommendations of respective state agricultural Extension services. Empirical research does suggest that the coming week is the primary planting week in much of the Mississippi River states for maximum yields. However, some of the very highest yielding years were associated with late planted cotton.
Thus, the long held adage – tomorrow’s weather is more important than today’s in predicting cotton yield – still seems to be the best bet. That is, the cotton crop has more than ample time to catch up, and has proven it can catch up. Thus, this week’s planting delays did spook the market a bit. But typically, the market will kill the crop two or three times during the planting season.
Of more concern, however, is the primary West African producer, exporter and major competitor Burkina Faso – a producer of high quality cotton that sells in the market at a discount to Australian, U.S. and Brazilian high grades. The dust-off with the seed company stands to create a yield decline and support prices long term.
Chinese reserve sales have been as advertised and have added some stability to the market. Speculators are credited with some of the week’s bullish price activity, as both the old crop July and new crop December hover around 62 cents – as much as 150 points above the prior week’s lows. Offerings by the Chinese government have been essentially fully subscribed.
There was wonderment as to why daily offerings were reduced somewhat, but that was only because the government had agreed to a total reclassification before delivery. Sales volume had swamped the reclassification process such that sales had to slow to allow the re-class process to catch up. Nevertheless, the reduction was small, and no ill effects were noticed.
It is of interest to observe the future rate of sales as the volume of domestic crop cotton offerings will increase as the imported stocks are worked lower. However, recalling the cheap wine analogy of several months ago (“If you price it cheap enough, someone will drink it”), the Chinese government has, in fact, priced the domestic low grades cheaper than expected, and low grades have sold better than anticipated.
A lesson for wine drinkers, or more correctly, cotton traders. Salute!
The trading range continues. A failure in new crop to hold 60.50 spells a test of 58 cents for the December contract.
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