Despite Bearish Reports, Cotton Continues to Hold the Higher Ground
The cotton market continues to defy the onslaught of bearish shots across its bow. It is showing its love of working the very top end of the trading range, while leaving the range bottom unchallenged.
The 64.50 to 65.00 cent area is providing the range bottom for now and is trying to establish itself as the new level of price resistance in the July contract. However, I am reminded that the better defined price support for the trading range is lower, at 61.50 cents.
As mentioned last week, the top end of the trading range is stretching its elbows and trying to pull itself up to 69 cents. The bright side of that, in fact the market did trade above 68 cents for the second consecutive week, as the October 2015 contract closed the week at 68.11 after trading to within nine points of 69 cents. Thus, the six cent trading range between 61 and 67 cents appears to have given way to a five cent range between 64 and 69 cents.
Time will tell. But our discussions have, for a long time, suggested that July wants to see a 70 cent trade.
Too, the weekly market high of 68.91 cents came after this week’s May supply demand report which, on the surface, appeared to be overwhelmingly bearish. Despite USDA’s suggestion that consumption would exceed world production for the first time in five years, the supply demand report looked to be bearish due to essentially unchanged estimates for the U.S.
However, the week’s high trade being in the October contract – the price bridge between old crop July contract and new crop December contract – signaled that the textile sector sees some concern with obtaining premium quality cotton just prior to the 2015 crop becoming available. That is, mills are showing concern that they will not be able to obtain quality cotton during the October-November-early December time frame. This concern was amplified in that, just this past week, the lower/mid grades of cotton – the bulk of the world’s excess supply – became generally competitive worldwide.
Based on the May USDA supply demand report, the 2014-15 marketing year which will close on July 31 will have seen the production of 120 million bales, with 60 million coming from two countries – 30 million from China and another 30 million from India. The U.S. produced 16.3 million bales.
USDA projects world carryover to increase 8.0 million bales during the year – unexpected only in that both China and the U.S. produced smaller crops. However, India did have a record production, just a shade higher than 30 million bales, and became the world’s leading producer. Yet, the 8.0 million bale increase in world carryover did pressure the market despite the short world supply of premium quality cotton.
The marketing year is set to expire with the A Index near 73 to 76 cents.
USDA forecast 2015-16 production at 111 million bales, with world consumption at 115 million bales. That is, ending stocks are forecast to drop 4.0 million bales from the prior year, down to 106 million bales. Yet, this is less than a four percent drop and offers little, if any, price relief for growers. Yet, the stocks of premium quality cotton are forecast to be lower in 2016 than in 2015, and portend a premium into the mid-70 cent range for Middlings and Strict Middlings with a staple length of 1-5/16 and up. The longer the staple, the higher the premium.
With world carryover expected to fall to 106 million bales, USDA projects Chinese stocks will still total 62 million bales. Indian year ending stocks at the end of 2015-16 will be 14 million bales, and U.S. stocks will be 4.4 million bales – unchanged from the end of the 2014-15 season.
The market will begin to focus primarily on weather factors, closely watching Texas, where 55 to 60 percent of the U.S. crop will be planted. Ample rains have positioned the region for an excellent yield (well above forecast). Yet, the rains continue “to be so good” that growers have not been able to complete field work and remain behind in their plantings. This will draw more attention next week and in the weeks to come.
The Southeast is a week behind, but a non-issue this early in the season. The Far West is late, but only due to possible changes in their planting mix due to the severe drought. Time is not their issue. The Mid-South is essentially on schedule.