A heavy hand hit the cotton market on the weekly close, forcing prices to the absolute bottom of the long-term trading range, as December futures closed the week at 60.55 cents.
Market prices are now at risk of breaking below 60 cents. The first level of support stands at 59.81 cents and the next at 59.06 cents. Price support is layered below 59 cents, but is not particularly significant until down to the 57 cent mark.
This mutes my discussion of the potential for a 70 cent trade in the December contract and suggests that the demand for cotton has become extremely sluggish. Unfortunately, it also brings back to the surface the fact of weak cotton demand, which is directly tied to the weak world economy and the unabated loss in market share for cotton to the chemical fiber market.
For one of the very few times in my short life, literally, every technical price indicator points to a “100% Sell” signal for cotton (actually, I like that – there are no buyers left to lay bearish trades on!).
Yet, such a continued loss in market share – coupled with the insurance-based planting signals sent via the 2015 farm bill – make for the potential of a further decrease in cotton acreage in 2016. While 2015 U.S. plantings fell into unchartered waters, a further reduction in 2016 would but pile on the demand fiasco facing cotton.
Nevertheless, hope springs eternal. With the U.S. cotton industry enhancing its role as the world’s leading producer and exporter of high quality cotton, the market should rebound to at least the point of maintaining U.S. production near 15 million bales, or approximately 10.5 million planted acres on a long term basis. Yet, with casual cotton clothing having pushed its way somewhat into the luxury goods market, it has become more problematic for the historical cotton denim market to rescue cotton prices. The U.S. cotton industry is now facing a different battle as it fights to stay relevant on the world housewife’s casual wear screen – once a market that was the sole provenance of cotton.
Nevertheless, it will take an active trading market of near 70 cents minimum to maintain U.S. acreage. Lower prices would, in the long run, be detrimental to the consumer, as well as the cotton industry.
This recent slide to lower prices comes on the heels of a seemingly bullish supply demand report – another price signal that, despite shrinking supplies, does not offer enough of a demand boost to help prices. For example, weekly export sales totaled a net of 96,600 RBs of Upland and 4,000 RBs of Pima. The primary buyer was Vietnam. China took a marketing year low of only 1,056 bales. Shipments of Upland fell to only 59,400 RBs, putting the U.S. well behind the pace need to make the USDA estimate for the year.
On the international front, the recent rains woke up the Indian monsoon. To be sure, any rain is good during the cotton growing season. However, the moisture was mostly much to do about nothing. It came too late to do much good. That crop still looks to be 1 to 2 million bales lower than the USDA estimate.
Same song…and I am still off key. The bias is for a return to the 66 cent area in December futures.