Cleveland on Cotton: Short Run Favors the Bulls; Fundamentals vs. Technicals

    ©Debra L Ferguson Stock Photography

    The new crop December futures contract simply got too close to 69 cents and had to back off lest the bulls get too excited. All contracts closed the week in the red. While growers are wanting to see a 70-72 cent trade, and don’t write that off, mills are sitting back hoping to see the market break below 66 cents and drop to the low 60’s. That can’t be written off either.  

    In the short run I favor the bulls over the bears. Note I said “the short run.”  However, based on Mother Nature dressing in her normal attire, it is difficult not to side with the bears. This has been the market’s major theme for some two months. It is just too early to peg the crop size in either India or the United States, two of the world’s largest producers. (The same can be said of China, but neither the Chinese crop nor any of its carryover stocks will be available to the world market.)

    This bullish-bearish dichotomy is expected to keep the market range bound until the release of the August USDA supply demand report, another two weeks away. The narrow three cent trading range, 66-69 cents could bleed a little either way, but it will take supply news to break the range.

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    There is not any disagreement between analysts that demand is increasing and world carryover will be lowered in the coming marketing season, 2017-18.  Increases will be noted in China, India, Bangladesh, Vietnam, Indonesia and Turkey as well as other countries. However, Chinese demand has increased at a stronger pace than has generally been recognized. This bodes well for the major exporting countries, U.S., Australia and Brazil, the primary sources of high quality cotton. (West African does fill a void, but its quantity is limited.)

    Assuming the monsoon continues to be fruitful, India will boost its export share as well. More importantly, it will not be in the market for U.S. growths. Brazil and Australia are major supplies of high quality, but their volume is somewhat limited compared to normal. Thus, the U.S. will continue to be primary shopping ground for textile mills. This was evidenced again in the weekly export sales report as next marketing year sales totaled 232,600 RB.

    With less than two reporting weeks remaining in the old crop season, new sales have climbed about 5.0 million bales and will be some 5.3 million at the end of reporting period. This will rank 2017-18 forward year sales as the third highest in at least thirty years.  Additionally, another indicator of demand boost is the level of old crop export sales and shipments. Shipments have now exceeded the current USDA estimate and may probably climb to 14.8 million, some 300,000 more than the USDA number.  Thus, 2016-17 carryover will fall to 2.9 million bales. The marketing is trading with that expectation.

    The continued strength in export sales and shipments have caused the October-December inversion to further widen, 142 points based on the weekly close. Additionally, the December-March inversion strengthened out to 57 points. Likely, given the shortage of high quality that will be available for third quarter shipment the market inversion will continue, being more pronounced in the October-December spread. It will be difficult for the December-March inversion to be maintained, but it too is presently help captive by Mother Nature.

    The typical/normal crop development and harvest season must progress such that enough of the 2017 crop can be harvested in time for delivery against the December contract. As we all know, that is easy to say but considerably risky for cooperatives/merchants needing to satisfy mill delivery requirements. The potential risk this season is far greater than most due to the low U.S. carryover and the high level of early export sales.

    Textile mills continue to sit back counting on lower prices during the coming season. Mill on-call sales are beginning to swamp on-call purchase, but with nothing but time in front of the market the situation is not gaining much attention. It should be noted as mills could be squeezed in 2018 as the were in 2017.

    I received some critical comments relating to last week’s comments suggesting that technicals were carrying the market and fundamentals were not important.

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    First fundamentals are important. In fact, it is the fundamentals factors that determine the price season to season and in between. Fundamentals determine price, period. However, during times of market lapses such as “dead fundamental news,” technicals take over and rule the day. (Such as the Dog Days of August.)  Too, unless there are new fundamentals almost daily, then at any given point in time the technical indicators can and have taken over market trading.

    Fundamentals can be viewed as the price map that takes the market from point A to point B. However, in that the market determines daily, or minute by minute, where it is going, traders do not know the way. Thus, technical indicators become keys on the road map that traders use for that trip. Sometimes a detour may not make logical sense and at other times it may seem prices might be going the wrong way, but technicals spot these diversions and forks in the road.

    Thus, and my fundamental friends cringe with I say this, technicals are the Leading Indicators of Fundamentals. In my personal trading—which I no longer do—most every time I went against the technicals, I was proven wrong.

    The market will look for the very low 70’s in August, but will likely move lower into harvest as U.S. crop does hold the 18.6-19.3 million bales range. A smaller crop would support prices at a higher level.

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