Cleveland on Cotton: Overbought Market Cleaned Out its Closet

    ©Debra L Ferguson Stock Images

    Hedge fund managers continue to juice the cotton market, overbought as it is, as fund money continues to flow to all commodities, especially oilseed and metal markets. As mentioned in the prior newsletter commodities continue to be the darling of investment funds.

    Cotton trading closed above 6 month highs and spent time trading above 9 month highs during the week. This was a treat for a market that had only produced negative annual returns as the year approached its midpoint. The longer term trading range remains in play, 61-70 cents, and all but one of the technical tests have now been met to suggest that the 65 cent level will become the “new” support level. Actually, it is necessary for December to hold about 63.50 cents to keep the 65 cent mark as price support.

    The fact that prices dipped on Thursday should not be alarming despite good fundamental news on the day. Again the market was monster overbought and simply needed a day or two to clean out its closet before getting its jogging shoes on again. Yet, against all the hype and massive equity liquidations that have already been thrown in the commodity ring, more is sure to follow. Commodities are a very hungry market and are begging to be fed. Index funds are flush and potentially throwing caution to the wind and swelling commodity open interest every day. As open interest in the July contract declines (first notice is less than 3 weeks away), the new crop December open interest swells every day — reminiscent of a Fernando Botero painting.

    Painting by Fernando Botero Painting by Fernando Botero. Click image to enlarge.

    Export sales were impressive as expected. The mills hand to mouth buying has swelled sales as mills continue to scramble for immediate delivery and compete for the few remaining high grade bales. There is plenty of SLM 1-1/16 with premium characteristics to feed the world, but mills are looking for excellent lots of M 1-3/32, or more specifically GM or SM 1-1/8 inch grade with premium mic, void of short fiber, and premium GPT. Net sales of Upland totaled 110,100 RB with Pima sales of 6,800 RB. Vietnam and China were the leading buyers of Upland with China and Japan being the primary takers of Pima. Sales for 2016-17 delivery were also impressive with 112,700 RB of Upland and 17,800 RB of Pima.

    Shipments totaled 203,600 RB of Upland with Vietnam, Turkey, South Korea and China being the primary destinations. Pima shipments totaled 11,200 RB with India, China and Vietnam being the primary destinations. With stronger than expected demand noted, mills are paying up more than in the prior three quarters. They cannot be said to be chasing the price higher, but are beginning to ease their price expectations higher. Nevertheless, the wider trading range is still active, 61-70 cents. However, with the high potential that the new price floor is 65 cent, basis December, mills have had to raise their offers. Yet, merchants have expanded the certificated stocks to more than 104,000 bales. Thus, they appear ready to make heavy deliveries against the July contract. Mills, have been slower than expected to complete fixations on the expiring July contract. While this could prove costly and they could be in for a squeeze, the fact that the expiring July contract has been losing relative strength (RSI) to the rest of the futures months will limit any July price advance.

    Too, the Chinese Reserve has now completed one month (27 days) of auction activity. Sales include 1.93 million bales of domestic cotton (420,042 62 tonnes) and 1.36 million bales of imported cotton (296,129.07 tonnes). Reserve sales, just like most of China are on a 5-day holiday (Thursday-Sunday) celebrating the Dragon Boat Festival and will resume on Monday.

    Cotton Commentary

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    Repeating from the prior newsletter, the Secretary of Agriculture has released some $300 million to assist growers in preparing cotton for the market. Through the Cotton Ginning Cost Share program, eligible producers can receive a one-time cost share payment, which is based on a producer’s 2015 cotton acres reported to FSA multiplied by 40 percent of the average ginning cost for each production region. The regional payment rates are $47.44 for the Southeast, $56.26 for the Mid-South, $36.97 for the Southwest and $97.41 for the West.

    USDA released its June supply demand report at week’s end. The report was completely as expected. USDA did catch up to long help industry reports regarding China by reducing the 2015 crop 1.3 million bales and lowering its forecast of the 2016 crop by 1.0 million bales. These changes carried through to world ending stocks which were estimated at 94.7 million bales. This represents a drop of 7.3 million bales on the year, down from 102.1 million bales of beginning stocks.

    With July and December contracts ending the week at 65 cents, the trading range continues. The 63.50 cent support must hold to keep the 65-70 cent range active. Growers are advised to feed a hungry market, at least a taste. Keep it coming back for more.

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