Cotton Prices Slide; Chinese Buying Increases

They were correct and I was wrong. But then, the market is always right. 

The five-month 81-to-82 cent support level in the spot contract month finally collapsed, sending December down to 79 cents. The first level of support is now at 78 cents, with another layer at 75-to-76 cents. While I had felt the 81-82 cent support was sufficient in supporting the market, I must now drop down to the 78-cent level to find support. Once breaking the 82-cent level, the bears would not relent until the 79-cent mark.

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But, the market has now been down almost daily for two weeks and should begin a period of consolidation.

The breakdown below 82 cents triggered the liquidation of long-established, speculative long positions. This fund liquidation, coupled with the uncertainty of global crops prospects (created by the U.S. with its government shutdown) and the questions surrounding the potential slowdown in the U.S. economy, helped trigger the price slide. The 78-cent level should hold as prices consolidate next week.

With USDA reopened, the treasured government reports are back. We can take our usual pot shots, but, once again, we see how very valuable those reports are to both the market and to the agricultural community.

This week’s export report exacerbated the market decline, as only a reported net of 44,000 RB of Upland was sold the prior week. Pima sales totaled a healthy 25,400 RB, with over 80 percent of those going to China as global ELS stocks dwindle. This could potentially create another decline in 2014 plantings of Upland in the U.S. West region, with more acreage again shifting to Pima.

Chinese mills had taken a rather cautious attitude toward purchases due to the shortage of Chinese quality cotton and concerns surrounding the ICE contract. China has again become an active buyer of U.S. cotton, as the drop in the ICE December contract has again made it possible for Chinese mills to purchase U.S. cotton, pay the full tariff duty, land it at their mill, and still pay less than what they would pay for local Chinese cotton. Consequently, this has led to only a slight drop in cash price offered by merchants to growers, as the basis has seen a significant shrinkage. 

The tightening of the basis was evident this week as the West Texas basis fell to 150-to-175 off the December contract, the tightest basis that region has seen in years and truly one of the tightest in decades. This speaks to the potential shortage in quality cotton in the world. 

Quality U.S. cotton is demanding a premium, and foreign mills are queuing. The 82-cent level is our next level of resistance.