Doane Cotton Close: Old-Crop Rally Running Out of Steam

Today’s price action only reinforced our view that the squeeze on old crop prices is running out of juice at these price levels. The 2014 outlook is dubious at best. We note that over the course of this latest rally, new crop futures have gained only 1 cent per lb. for every 3 cent gain in old crop. And even the old crop demand is only for high quality cotton needed for denim, where demand is robust.

Now take a look at the weekly chart for more evidence the old crop rally may have gone about as far as it can. That very narrow weekly range from last week followed two failed attempts to take out previous highs just under the 94 level. Technically, there’s MINIMUM downside risk in old crop futures to the uptrend line crossing at about 88. And should that fail, this weekly chart shows no further technical support until 82.

By way of review thus far this week: Revisions to the U.S. balance sheet in Monday’s March WASDE report were price neutral to a little negative. Pre-report trade estimates of U.S. ending stocks averaged 2.8 million bales, down 200,000 from the February estimate on expectations USDA would cut its production estimate by 100,000 bales while raising exports by 100,000 bales.

USDA did cut ending stocks by 200,000, as expected, but by raising exports 200,000 bales and leaving production unchanged at 13.2 million. As for its estimated average farm price range, USDA raised the lower end by 1 cent/lb., putting the new range at 75.0 – 78.0 versus 74.0 – 78.0 in February.

Globally, there were no pre-report trade estimates from wire services, but cotton futures gave up part of their early gains shortly after release because ending stocks rose 280,000 bales, to 96.75 million bales from 96.47 million in February. But even that was muted somewhat by the fact that estimated stocks for China were raised by 500,000 bales, nearly double the increase in global stocks. And it’s still unclear how bearish rising stocks for China are when it’s unclear how aggressively they will meter reserve stocks into their domestic market.

It was perhaps more significant that the hike in China’s ending stocks stemmed directly from a downward revision in estimates Chinese domestic use of cotton in the same amount, 500,000 bales for the 2013/14 marketing year. That could be due to domestic mills deferring late season purchases until the 2014/15 marketing year, when China has already announced it would be sharply reducing the offering price of reserve cotton stocks closer to world prices.

As for Thursday export sales, they were down 62% from the prior week and 36% below the 4-week average. But as far as sales YTD, they are still where they should be as a percent of USDA’s forecast for the year, even at the new higher level set in Monday’s WASDE report.