Thompson on Cotton: Market Influences More and More Bullish

    Cotton bales in gin warehouse. ©Debra L Ferguson Stock Images

    With cotton trading between 72.50 and 75 cents for weeks now, last week’s action started out like a roller coaster as Monday’s triple digit gains were all but erased after Tuesday’s triple digit sell off. The remainder of the week, however, resulted in positive trading with the March contract gaining 181 points to settle at 74.85.

    While only flirting with 75 cents, this psychological resistance level seems all the more vulnerable to a breakout as market influences grow more bullish by the day. Some overly optimistic market gurus say this is just the beginning and 80 cents lies in the cross hairs.

    Our camp isn’t quite that optimistic yet, and frankly, we believe a move into the high 70’s won’t be without a good deal of volatility. Let’s look briefly at these influences and what might lie ahead.

    The standoff between the trade and the spec community and its resulting price squeeze has had the greatest impact on the market as of late and will continue to over the next few months. The mills unfixed on call sales have increased to 11.8 million bales.

    More importantly short term, 3.5 million of this is based March with another 6 million bales based either May or July. One would think with the March contract nearing expiration, the likelihood of higher prices, and the specs comfortable in their long position, mills would be rushing to fix the price on these sales, which in turn would have the trade buying futures to cover their short positions. Such action would greatly aid a breakout.

    Instead, it appears mills are willing to gamble on the market going lower and roll their positions – similar to what they did last November; you see how well that worked out for them! Though things may get somewhat volatile during the next couple of weeks as both players begin their rolls, the mills can’t keep kicking this can down the road.

    Their need to fix will certainly provide support to this trading range while if the specs continue to stay long the market, which current macroeconomics influences would tend to favor, upside potential is enhanced.

    Also, history has shown us any sustained market rally must be a result of increased demand. The world’s growing desire for high quality U.S. cotton is becoming ever more apparent. After weeks of strong export sales, last week’s export report of over 456,000 bales was a marketing year high. Even more impressive was that these sales were distributed over 20 countries with China, India, and Pakistan being the major buyers.

    Cotton Commentary

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    This keeps us well on pace to meet the USDA export estimate of 12.5 million bales, though there is some concern with lagging shipment numbers. It’s here, we must realize Texas is still ginning, 6.5 months remaining in the marketing year and historically the heavier shipping months are in front of us.

    With very little old crop left to sell by producers, attention now turns to the December contract and new crop prices. It also advanced for the week, though behind the pace of March, delivering a gain of 60 points settling at 71.69. The December contract is just beginning to get a life of its own; up to this point it’s been drug along by March.

    It won’t be until planting intention reports begin to surface, field conditions are studied, and grower participation in the market increases that the new crop contract stands on its own. Though the same bullish influences just discussed can come to bare on new crop, the December contract’s advance into the low 70’s should be looked on as excellent opportunity to price a portion of your next year’s crop.

    Treat this as a gift, for it’s hard to imagine we are looking at prices nearly 10 cents higher than a year ago, after just coming off a record breaking 2016 crop and increased plantings expected in 2017.

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