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Treats, Not Tricks, Appearing in Cotton Market

The nearby New York December appears headed for another 63 cent plus close void of any excitement, volatility or increased open interest.

Mills remain cash market buyers trading generally only hand-to-mouth and being fully satisfied with their needs. Chinese mills continue to appear to scramble to find high quality cotton and have all but depleted the non-Chinese supplies that were stored in country.

I will get to the price outlook, but for now allow me a small sliver of freedom. Where is Jerry Calvani when I need him? Getting fat on pecans out in Carlsbad I suppose, and not sharing any. Jerry was about the only one that could decipher through my writings when I was struggling with the market. I seem to be struggling now, and he is a no show.

Early last week, I was about to throw in the towel. Now I am a bit more excited about prices moving at least a nickel higher. No, I am not bullish. But I am a ton more bullish than bearish!

The bottom is in. The year-long 61-69 cent trading range remains very dominant and, given the status of demand, will remain strongly entrenched at least through March.

The Northern Hemisphere is not yet 50% harvested, but the crop is getting smaller around the globe, notably in India, China and the U.S. The second crop in Brazil, fast becoming the more important of the two – absence exceptional Divine intervention – will be smaller than expected, as will be the Australian crop.

Trick or Treat. It is November now, past the time for a new seasonal low. It is time to move higher but it will take several trips to the dental office and a few 20 Mule Teams to pull cotton prices back above 66 cents, let alone the 68-69 cent top of the trading range.

Demand finally appears to be showing up at the retail shelves. But mills should not be expected to find themselves more active in the market until March. It will take active mill buying at that time to force the trade toward long positions friendly enough to pump up the speculative fund long activity.

U.S. export commitments are some 39% behind the 2014-15 pace, while commitments to China are 42% behind the same time year ago pace. Obviously there is a correlation. However, export sales to Vietnam are near making up for the difference.

One is tempted to conclude that it is the decline in Chinese imports that is the burden on demand and, therefore, prices. However, yarn imports into China continue to increase and offset what initially appears to be a decline in cotton demand by all Chinese textile activity. It is the declining demand by spinning mills that is measured by these statistics, not the demand for cotton that requires further processing before hitting the retail shelf. That is, it is a mere measurement of the decline in Chinese spinning and is not representative of a decline in the demand for cotton by the Chinese textile industry.

World cotton demand is increasing, just not at the pace needed to pull prices higher during the glut of the harvest season. Additionally, one should not be overly worried by the slow pace of USDA exports compared to the prior year. World trade is simply less than it was a year ago.

The November world supply demand report remains over a week away, but USDA enumerators are walking the fields as this is being written, collecting data for the November U.S. crop estimates. My guess is that the U.S. cotton crop will come down another 300,000 bales, down to 13.0 million bales.

However, whether USDA buys into it or not in the November 10 report, the Indian crop has already been severely diminished. Look for that crop to be between 26.25 and 27.0 million bales, compared to the current USDA estimate of 29 million bales. Granted, India has not yet completed the first picking of their 2015 crop, and USDA historically is somewhat reluctant to make significant changes until the first pick is completed.

Yet, the season-long international story has been about the Indian drought, and USDA has been slow to make adjustments – sooner or later.

Likewise, the Chinese crop could easily be another 500,000 bales lower, but USDA did make major adjustments in that crop last month, and, to their credit, earlier than expected.

Quality will remain the key, and U.S. growers with high quality cotton will see a further boost in prices.

Jerry, the American cotton growers could use you. Where are you?

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