Watching Bulls, Bears and Fundamentals
July 11, 2016 New York futures continue to surprise some traders, as they have become transfixed on the potential size of the 2016 U.S. crop. The crop is on tap to be a big one. An absolute disaster would yield an estimated 14 million bales, while exceptional weather hitting on all cylinders could produce a crop of over 17 million.
Yet, those would be for the absolute worst and best production scenarios. A more reasonable estimate would be for a crop between 15.2 and 15.8 million bales, so let’s call it 15.4 million for now.
Nevertheless, the current heat streak across the Cotton Belt may be playing havoc with the ability of cotton to pollinate. The first week in July had the Mid-South experiencing 100 degrees, and West Texas was 105 degrees. Thus, the U.S. appears destined to see supply exceed demand and build stocks in 2017.
The bigger U.S. crop will allow for exports of 11.0 million bales and domestic use of some 3.7 million. Yet, the U.S. is not the big boy on the production block anymore, and the production in India, China, Brazil and Australia draws more attention than that in the U.S. As we have discussed over the weeks, those collective crops are facing some very difficult weather scenarios that have kept a bullish tone in the market despite the potential for a barn-bursting crop in the U.S.
World stocks will be drawn lower during the 2016-17 marketing season despite the big U.S. crop because of the weather-reduced crops outside the U.S. Additionally, world consumption will outstrip world production. World stocks will fall some 2-4 million bales lower.
Currently, price leadership in the market is based on a combination of the Indian shortage and the excellent demand for the Chinese reserve stocks. Both of those situations were initially unexpected and continue to drive the market. For every hit the big U.S. crop takes on the market, those events punch back and have kept the market in a very narrow, but bullish trading range. The past five weeks have seen a range between 63.28 and 66.64 cents – just some 350 points. Thus, the week’s settlement in the ICE December contract of 65.81 was well above the midpoint of that range.
China continues to sell all the cotton it offers for auction on a daily basis. The reserve has sold approximately 5.5 million bales since the first week of May. Some 1.4 million bales have been imported cotton and the remainder domestic.
The leadership provided by the Chinese futures market cannot be overstated. The Chinese market sees more volatility and more speculation, but New York does look to it for direction. Nevertheless, the dominant trading range is between 64 and 66 cents, and I feel the market will spend most of its time within the range.
Currently, the upside has all the cards. Yet, I am very cautious of losing demand and more fiber market share to chemical fibers if New York moves above 70 cents. Actually, more market share will be lost even at current prices. Chemical fibers currently sell for approximately 51 percent of cotton. Moving through the summer months will see the wider nine cent range – 60-69 cents – continue to serve as the major trading range. Too, it is significant that cotton has been able to hold above 63 cents despite the strong selloff noted in oilseeds and grains the past two months.
Another view of the price picture is that of my technical market mentor and sage: “Technicals are the leading indicator of fundamentals.” I was very skeptical when he told me that some thirty years ago. Today it is one of my sermons. Fundamentals rule in the long run, but technicals provide the roadmap.
The instructions are easy:
- Never bet against the technical.
- Never bet against the trend.
- The trend is your friend.
- The seasonals are so important, write them on the back of your hand so you are constantly reminded.
In closing, let me recap a listing of bullish and bearish factors.
Bearish
- Chinese and world stocks remain excessive.
- 2016 U.S. crop potential in excess of 15 million bales.
- Chemical fiber continues to take market share from cotton.
- The U.S. and world consumer drift further away from cotton.
- Stagnant world economy.
Bullish
- Weather-reduced crops in four of the world’s leading producing countries – India, China, Brazil and Pakistan. The drought facing Australian 2016 plantings will likely make it five major producing countries with smaller crops.
- Excellent demand for Chinese reserve stocks with both volume and prices greater than expected.
- Declining carryover in the world’s major exporting countries.
- Chinese stocks declining in excess of 10.0 million bales.
- Mills are poorly covered for out periods and will have to scramble for cotton until January. Additionally, supplies will be tighter than in 2015-16.
- Declining world stocks.
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