Strange Mix of Positive Signs for the Market
Demand? Well yes, but not for raw cotton. It is the demand pressure on money managers to find profitable trades that have driven speculative fund money to the agricultural commodity pits in search of profits.
The grain complex, particularly oilseeds, have been on a bit of a tear, and that action has brought money back to all the agricultural markets, as money managers have exited the equity market and hedge funds are looking at futures markets for the big payoff.
Open interest in cotton has surged along with trading volume, a clear signal that new money has come to the cotton pit. Open interest exploded during May, and fund managers are looking to continue their purchases. Nevertheless, the rally is destined to fail, as market fundamentals are too bearish for a successful rally at this time. The five-cent range of 60-65 cents will hold. Yet, a little bleeding on either side of the trading range may occur.
Growers should look at this rally as a pricing opportunity for at least a third of their crop. Mills are encouraged to hold the line, but begin fixing prices on any move below 62 cents.
As discussed earlier, the May supply demand report implied that USDA viewed 2016 crop prices between 52 and 72 cents. Thus, with the market sitting in the middle and near the prior year’s average price, market participants should take action as the prices move away from the average(s). Funds (longs) will continue to look at the cotton market for additional speculative investments and will add additional funds on moves approaching 62 cents.
Yet, the 65-66 price resistance line appears very firm and will keep prices on the defensive until Mother Nature changes her outlook.
Mother Nature has kept the drought map busy in India and has altered some planting plans. However, the vast majority of the plantings are yet to begin, and some are on hold awaiting the soon-to-be, but late arriving, monsoon. You are reminded of the 100-year drought affecting Indian cotton plantings in 2015. The drought has not been broken, but a somewhat near normal 2016 monsoon season has been forecast.
The Indian grower caught a break with last week’s government decision to allow Monsanto genetics back in the country.
U.S. weather has been sporadic. Planting progress is generally in line with historical patterns. The Texas central coast is off to an excellent start, with all crops looking like 2.5-3 bales. The typical comment is “the best crop I have ever had.” Most of that acreage is FiberMax, so good weather will support those yields.
The remainder of the U.S. is plodding along, generally on schedule – maybe not with optimum planting conditions or planting dates, but still getting in without much concern. The Arkansas boll weevil group suggests acreage will hold at the 350-360 thousand acre level. The Mid-South will lose minor acreage to soybeans, but only due to weather-related planting problems.
The USDA 14.8 million bale 2016 production estimate is very much on target.
As stated last week, the near term price bias was up, but long term, the market wants to trade below 65 cents. July will move to first notice day in just more than three weeks. While the optimal cash basis for old crop has passed, growers will still have limited opportunities to price into a July contract that is looking to hold above 63 cents. The fund long rolls began May 27 and will continue for another week (buy December-sell July) and will lightly pressure July. Yet, and purposely being redundant, the narrow 4-5 cent trading range will still prevail.
Mills shortages have breathed new life into the market. It did not hurt that prices dipped to the low end of the trading range. Sales continue as a bright spot, as weekly net sales totaled 145,200 RB – 128,500 upland and 16,700 Pima. Marketing year 2016-17 sales were very large, with 119,200 RB of upland and Pima sales of 2,400 RB. Vietnam, China and Turkey were the primary buyers.
Mills continue to scramble for immediate delivery, and signs are beginning to show that Chinese demand is expanding. Denim appears to be the better market.
Exports of 236,500 RB for upland and 18,200 RB for Pima were reported. Vietnam, China and Turkey were the primary destinations. Exports continue to offer the market a carrot, as Chinese sales are stronger than have been expected.
The reason is hidden in the Chinese Reserve auction sales. As the volume and the percentage of domestic Chinese cotton increases, the level of imported cotton (mostly Australian and U.S. GM’s and SM’s) declines. The Chinese hope to replenish their supply of high quality new crop from local production. But, in case they cannot, they are buying U.S. and Australian quality cotton. Thus, U.S. sales to China are stronger than had been anticipated (too, there is every evidence to suggest that the Chinese crop has suffered from very poor planting conditions and very poor early season growth.)
Give a gift of cotton today.