Getting Legs Under This Young Bull Market

The new baby bull, now just some five weeks old and falling with almost every step, finally completed a few successful steps this week. As we have said for two weeks…keep the faith.

USDA came forth with its second consecutive bullish supply demand report. And just like the response to the November report, the market was very slow to react. Yet, by midweek – and in reaction to a very positive export sales report – prices pushed higher. Then, some two hours later, Washington announced it would compromise slightly with a portion of the Chinese tariff requests. That announcement was all that was needed to send prices on a triple digit parade. Prices surged higher, reminding us again to “keep the faith.”

The bullish December supply demand report, coupled with the strong export sales report and the limited temporary tariff compromise, led cotton to triple digit gains. Thus, prices broke above the long standing 67-cent price resistance barrier.

The bear is of the past. Yet, the bull remains just a bit wobbly legged. Don’t look for the market to enter an exciting new breakaway phase. In fact, I don’t foresee that in the near to mid future. Yet, one should expect the market to now mount a challenge of the 72-73 cent level, basis May.

Yet, we note that after challenging 68 cents, basis the March contract, the market sold off and finished the week just below 67 cents. There was a two-sided meaning in the weekly settlement slipping below 67 cents. The new bull remains a bit weak and will continue to need care if it is to mature. More importantly, the market finally received a boost from real tariff resolution news, and all it could muster was a very short-lived boost of only less than 100 points.

We have warned repeatably that cotton fundamental news had control of the cotton market and that soothsayers should no longer expect any price boost from political-related news about tariff resolution. Speculative buying was energized by the tariff resolution announcement, but fundamental reality kicked in, and the “tariff price boost” all but evaporated. Don’t expect tariff news to be more than a bit player in the cotton market.

The important activity on the week was that the market was able to finally close above 67 cents (one day only) and settled the week essentially at 67 cents. Now, the gut-wrenching teeth pulling can begin as the market attempts to move up to the 72-73 cent trading range.

The bullishness began back in October and was first reported in the November world supply demand report. Since October, USDA has noted the following very bullish changes in market fundamentals:

• U.S. production reduced 1.5 million bales
• U.S. carryover reduced 1.5 million bales
• Indian production reduced 1.0 million bales
• Chinese production reduced 500,000 bales
• Pakistan production reduced 1.3 million bales
• World production reduced 3.6 million bales
• World consumption reduced only 1.3 million bales
• World carryover down 3.3 million bales

Note that the world’s largest producing countries have experienced significant reductions in crop size while world consumption has remained considerably more stable. The resulting 3.3 million bale drop in world carryover was the market fundamental that killed the bear and birthed the new bull.  Since its October estimate, USDA now expects a 300-point higher average farm price for the 2019-20 marketing season.

U.S. export sales and shipments are ahead of the five-year average. U.S. sales to date remain the second highest on record and are 16% ahead of the prior year’s pace.

Significant sales this week were made to Turkey, China, Pakistan, Vietnam, Bangladesh, India and Malaysia. Excellent shipments were noted for China, Pakistan, Vietnam and Mexico (the most recent export sales report can be found here).

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