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Quality Continues to Drive Cotton’s “Joyful Ride”

Cotton’s joyful ride continues, as prices have pressed the 65 cent level, basis the March and May contracts. With FND coming for the March contract next week, the May contract is set to become the lead month.

The price increase was led by the exit of shorts from the market. We had discussed the massive short position and the very low level of certificated stocks, suggesting that the shorts would have to exit the market before FND on the March. Exit they did, covering a record number of shorts over a two week period from early February through this past week. In fact, the volume was so large that the market moved higher a bit too fast and became a bit overbought, thus slowing the advance.

Yet, the market has essentially climbed to its next major resistance level just above 65 cents, settling the week at 64.67 cents – up close to three cents on the week. However, this suggests trading could be a bit sloppy between 65 and 66 cents. Eventually, that resistance will likely be broken, or the U.S. will essentially sell out of cotton. And as was said a couple of weeks ago, we never sell out.

The market will likely have to climb to 68 cents or above to ration U.S. carryover to 3.4 to 3.5 million bales.

Too, weekly export sales expressed that cotton had become a bit pricy for some mills, as well as noting that Indian cotton was becoming more competitive in the export market. Weekly net sales of U.S. Upland cotton were a negative 69,700 bales, a marketing year low. While sales were made to fourteen countries including Indonesia, China and Vietnam, major cancellations by Turkey were the cause of negative weekly sales. Turkish cancellations totaled 81,700 bales, and another 19,700 bales by China and 13,300 by Mexico were also cancelled.

While Chinese and Mexican sales cancellations were not unusual, the Turkish cancellations were most unusual, in that they are in retaliation by the Turkish government against the U.S. government’s trade dispute over pipe. The U.S. prevailed on a pipe importing case against Turkey, so Turkey has chosen cotton as the commodity it will penalize. Demand will not be affected. Yet the Turkish mills – not the U.S. – will be the ones to suffer, as it will tend to push Turkey to more expensive cotton, mill delivered, and cottons with which the Turkish mills have less spinning familiarity.

Weekly shipments remained very strong, with Upland at 288,500 RB and Pima at 17,900 RB – a marketing year high. The major destinations were China, Vietnam, Indonesia, Mexico and Turkey (not all sales have been cancelled). Yet, while shipment levels remain strong, the concern surrounding further cancellations by Turkey loom large.

Additionally, not only has the port strike not been settled, additional fuel flows to the fire most every day. The sides hardly speak, even though they are overtly familiar, having a long history of clashes and strikes. The last such strike was ended by President Bush invoking Taft Hartley (back to work order) after a 10-week work stoppage and a $10 billion loss to the economy. The loss today is suggested to be a billion dollars a day. President Obama has not publicly addressed the situation. The strike is now expected to expand well past a work slowdown and move to a phase of both work stoppage and an expansion in the number of ports along the West Coast.

The market’s ability to rise well above the 57 cent support level suggests that it either does not accept USDA’s bloated world carryover estimate of 110 million bales, or that quality cotton does make a difference.

Let’s assume, as economists love to do, that USDA has in fact overestimated Chinese stocks by 20 million bales and the Indian crop by 10 million bales, as is claimed by more than a few. That said, there would still be 80 million bales of cotton in carryover. I really do not know how much cotton that is, but it is too much, far too much. That much cotton – 80 million bales would, as it did in the past – put significant downward pressure on prices. Yet, to date, the market has performed very normal – i.e., a nice rally after the beginning of the new year.

Thus, one little tidbit number in the USDA balance sheet – supplies held by exporting countries – could have meaning. While other countries are included, notably Uzbekistan and India, exporting countries to a large degree are the U.S., Australia and Brazil. As we have broken the record by playing it every week, it is the declining stocks in the U.S., Brazil and Australia that are holding the market up and will, in fact, push the market higher.

Machine harvested cotton is in demand, and its premium is only gaining strength. The Mid-South harvested its finest quality ever this year, and actually was the U.S.’s primary supplier of quality cotton (in volume, noting the low volume of Acala/SJV). The market is asking for that quality, not SLM 34’s. Forget it. It wants and will pay for M’s and SM’s. Lengthwise, it wants 36, 37, 38’s. It loves the 40’s it got out of Oklahoma last year.

Location is not so important (outside of Acala/SJV). It is quality, quality, quality.

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