The market was brutal to cotton for the second consecutive week, as seven of the past nine trading sessions have seen new life of contract lows. The market broke below its important 62.50-63.00 cent support, basis December futures, and will likely continue to ease lower into the high 50s.
Demand is without question the principal culprit, but is closely followed by ever-improving crop conditions in the U.S. and around the globe. Further, China continues to dump the high pollutant polyester on the market. The dive in prices activated technical market conditions that do, in fact, predict a continued sell-off in cotton prices.
Nevertheless, end-of-the-week trading did see a triple digit day to the upside and offered the bulls a glimmer of hope. However, the buying appeared to be very weak and suggested only a brief short covering rally was in play. The rally fizzled near the close, with settlements closer to the weekly low rather than the weekly high.
Of more concern was that open interest increased as prices retreated. Thus, it was apparent that new speculative money pushed the market lower. The classic signals of a down trending market were front and center – lower price lows and lower price highs. The market should be expected to work lower in the face of demand weakness.
The potentially devastating hurricane Barry turned out, for the most part, very beneficial. The entire Mid-South received welcome moisture, with the exceptions of a north to northeast swath of Louisiana acreage which was flooded, and a similar streak from northeast Mississippi into western Tennessee. There were other areas that went under water, but they were limited. The Black Prairie region of Mississippi/Alabama, off to an excellent start, received the so-called million dollar rain.
The widespread coverage was of net benefit to the U.S. crop. While the crop continues to make excellent progress across the Belt, a high pressure weather system is now covering the entire Cotton Belt with the exception of the West region. This should be monitored, as such a system promotes dry weather, and both the Carolinas and Georgia will need moisture in the near term.
Clearly the supply side of the price equation and the demand side of the equation are working in unison to pull prices lower. The weakening in demand is evidenced by the declining yarn prices throughout Southeast Asia and China, as well as in India and the subcontinent. Virtually all yarn producing countries – and especially yarn exporting countries – are experiencing a down trending yarn market.
Additionally, in an attempt to generate hard currency, China is reducing prices of its apparel and textile products to hopefully stimulate demand.
On-call purchases (futures selling) continue to outpace On-call sales (futures buying). This is an indication that textile mills are content to let prices continue to drift. Mills are adamant that prices are headed lower, and there is little evidence to suggest otherwise. Potentially, prices are on track to drift lower into the first two weeks of August in anticipation of an even further damaging world supply demand report.
Bulls are suggesting the U.S. acreage estimate is overestimated. Certainly, “standing acreage” is less than planted acres, but the crop condition index is beginning to suggest that yield will more than compensate for the lost plantings.
Both U.S. export sales and shipments continue to lag USDA estimates. It is apparent that the August world supply demand estimates will reflect a further increase in world carryover (remember the inverse relationship with price). U.S exports will be reduced as well, and this will cause an increase in U.S. carryover. The price tendency is lower.
Give a gift of cotton today.