Cotton closed the week higher as the May and December contracts were some up some 100 points and the July was marginally better, but essentially unchanged from the prior week. Nevertheless, most of the active contracts traded through triple digit days all week.
The old crop May contract moved to first notice day (FND) with little fanfare as mills became active with their May price fixations. Yet, there remains more than a bucket load of fixations to fix on the July contract. This will continue as bullish fundamental supporting the July contract. Likely July will see another run that will challenge the 95 cent mark, but it does appear to be tiring. Prices have done their job in rationing cotton supplies, but most sellers have some cotton to offer. In fact, offers are more frequent than bids as evidenced by the widening cash basis. The cash basis weakness is very noticeable at all global origins. As the July contract works through the July 31 end of the 2013-14 marketing season, look for the trading range to expand to the ten cent range between 85 and 95 cents.
The December contract finally cleared the 82 cent barrier and now has its sights set on 85 cents. There will have to be a few teeth pulled before that is done, but the technical objective is there.
Mother Nature has control of the new crop: from freezing rain and snow in China, to early forecasts of a weak monsoon over the Subcontinent and Southern Asia, and to the well documented drought in the Southwestern and Western U.S. These forces, and others, are filling the bull’s cup at present. Too, the water shortage in the Western U.S. has taken out of production 3 and 4 bale per acre cotton.
The market is beginning to kill the crop before it is even planted. Yet, it is not unusual for the market to kill a crop 2 or 3 times before it is up and established. However, the 2014 crop is dying its first death in the current market. News headlines include the already approved recycling of sewage waste for human water consumption (Wichita Falls) and the fact that the first 90 days of 2014 were the third driest in some 60-70 years for West Texas. (Recall the Texas long term drought cycle has been referenced for a number of weeks.)
The Texas drought is more newsworthy this year than the prior 3 years in that there had been an adequate supply of high quality cotton to satisfy world demand in those other years. Such is not the case this year. While many focus on the massive supply of stocks held in China the market is discovering that the bulk of the Reserve’s cotton fails to meet the quality standard required by major spinners, and particularly the standard required for high count yarns. Even the staple length of the 2013 Xinjiang crop has proven to be short, and thus, undesirable.
Paraphrasing Samuel Taylor Coleridge and with apologies to his worthy legacy, “cotton, cotton everywhere and not a bale to spin.” With that backdrop the weekly export sales report indicated China purchased 105,000 RB for May-July shipment. Most were left asking why and now we know–Chinese mills need cotton. In response to the government’s move to a market economy, cotton production will decline in China. Further, Chinese mills are taking up less than one third of the cotton being offered by the Reserve, thus China will remain a major importer of U.S. cotton. The summation of these and other factors will continue to work to maintain cotton prices above 80 cents for the foreseeable future.
Open interest in both the July and December contracts has seen noticeable increases over the past 2 weeks. While some longs are taking profits other longs have reentered the market. This potentially bodes well in helping control the volatility in the market and that is expected to continue for the remaining life of the July contract. Yet, July could still see a ten cent swing in the coming month.