Prices Hint That the Market Bottom Is In
Price equilibrium continued in the cotton market this week.
Early week activity made another attempt to generate a short covering rally, but the back end of the week saw mills step away from the market. Thus, prices moved lower for lack of any fresh buying.
The 66 cent high, basis December, did uncover some limited short covering. However, December gained from an influx of funds that were switched from a very disappointing energy market to cotton long positions. However, the rally was left on an island when no other buyers stepped in to pull prices higher.
Look for the equilibrium price to remain the order of the day. The trading challenge is firmly entrenched and, for now, prices are well locked in the channel. New fundamental information will be necessary to escape the 61/62 cents to 72 cents channel. However, and more importantly, new fundamental information will have to unfold before the very narrow 3 cent range – 62 to 65 cents – can be broken.
It is anyone’s guess as to what that “new” fundamental factor will be. Possibly it could be the strong cyclone currently hitting the entire Gujarat region in India, a very important producing region. The potential damage there could be very noteworthy. Possibly, the world crop will prove to be smaller than currently predicted. Too, demand is sending some mixed signals, but most suggest a very robust increase is coming.
However, I suggest the best place to search for this “new” fundamental is our ole fundamental friend, China. China’s official voice is straightforward and should be believed. However, just as important as what is said, is what is not said.
For example, the voice stated that imports would be limited to WTO requirements only. However, the voice did not speak about processing quotas – another vehicle that can be used to bring cotton into the country. Additionally, we know yarn imports are making a rapid recovery and are flowing into China as if a dam had broken. That yarn was not included in the supply demand table for China, and now will have to be added to the demand side of the price equation. Same for the processing quotas.
Too, China is slightly altering its ELS spinning and is mixing more very high grades from the U.S. and Australia with local and imported ELS. Ideally, they are attempting to find roller-ginned Upland and are having some success. This only keeps the basis stronger, and for longer, for saw-ginned, high quality machine-harvested cotton.
As if by direction, U.S. export sales finally blossomed in the face of lower prices, sailing above 200,000 bales. Net sales of Upland totaled 185,400 RB, while Pima sales were 5,100 RB. Indonesia, Mexico, Thailand, China and Turkey were the primary buyers. Too, some 18 countries were buyers on the week, indicating that demand was again broad based. Total U.S. export commitments as a percent of total projected annual exports are at 63 percent, versus the five year average of 56 percent.
The Goblins will continue to haunt the market past the Halloween holidays, but the market is giving more signals that the bottom is in. Let’s plan on the usual January rally and look to focus on the production of higher quality cotton.