Cleveland on Cotton: Long Term Bulls Heading Back to the Market

    Okay, patience was good. Let’s move on.

    Cotton is well above the dollar mark. The weekly close of 108.59 cents had little help from the funds. The U.S. crop has been decimated and stands at only 12.57 million bales, some 3 million bales less than last month’s estimate.

    The August USDA supply demand report was very bullish for cotton, all the way out to the 2023 crop. Funds will step in, but any market must have an equal number of sellers as buyers. This market, bullish as it is, may not find enough sellers too keep the fires burning.

    December looks to move to the 112-117 cent area, and then back and fill some five cents below and five cents above that trading range. Most are expecting new life of contract highs in December and a push to 130 cents. Some have another 30 cents pegged on to that.

    Sellers are equally important as buyers. I am worried if there are enough sellers to support much higher prices. Retailers will not push the market higher. Mills will not have yarn orders to push prices that high. As bullish as I am, I am only just a little bullish on prices. The great and positive news to me is that the market has positioned itself to ensure cotton plantings will be strong for at least the 2023 and 2024 seasons.

    The 125-cent level for the December 2022 contract is within reach. I did not say it is “well within reach,” only within reach (all bets are off if either the U.S. crop or the world crop gets much smaller, then 150 cents comes in play very quickly). The ongoing recession, coupled with several more interest rate hikes that are coming, will continue to restrain demand. Otherwise, the December futures price could climb into the 140s-160s.

    Demand is not present. Typically, I like being bullish, and I like cotton into the 120s, but demand is one problem and consumer spending/confidence is another. These factors will work to keep cotton prices in the 120s.

    My friends seem to think the 140s-160s are in store for the  December futures contract. I don’t. I hope my friends are correct. Give me a smaller world crop and I can get much more bullish.

    My initial caution is the old market adage “Short Crops Have Long Tails.” We know this crop is short. Historically, the price of a short crop is bid higher during the growing season. Then, during the early stages of the harvesting season in anticipation of a crop that might be even smaller than forecast, price tends to reach its highest point.

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    Once the crop forecast appears somewhat accurate, prices began a slow, slow retreat, tracing out the pattern of a dog’s tail on a price chart – a downward sloping tail into the spring months and to the end of the marketing season. Yet, with carryover so low, the end of the year price can still be near the dollar mark.

    Everyone and their brother-in-law will know the magic word is cotton by next week. Speculative and fund buying will kick in, and the next price stop is predicted to be somewhere near the North Pole. Yet, the market may find itself with few sellers. The trade will not be a seller.

    Something close to half of the crop has already been sold. Merchants will be reluctant sellers of even physical cotton for export with crop size so much in doubt. Growers will not be sellers, expecting higher prices.

    Thus, while I want to be very bullish, I can only be mildly bullish. This is not a demand market. This is a supply driven market, and price activity is simply different. A short crop year coupled with a lack of demand leads to seasonal price highs during the harvest season.

    The price high is not around the corner. The market will slowly grind higher into the very late stages of the growing season. Additionally, if production problems continue in Brazil, India, China, and Pakistan (and there most definitely are some), then the price objective becomes higher.

    Too, back to patience. Be patient with the December 2023 contract price. Growers will likely, at some point, see the dollar sign on associated with the 2023 crop.

    USDA made few changes in its monthly report – none unexpected other than the U.S. crop being 1.4 million bales smaller than expected. World production was lowered 3.1 million bales (only a mild surprise), down to 117 million bales.

    World consumption was reduced 830,000 bales, mostly in the Subcontinent and Southeast Asia. World carryover was reduced 1.5 million bales, down to 83 million bales. USDA did lower U.S. carryover, as expected, to 1.8 million bales – not a record low, but one of the lowest on record.

    The on-call report was noteworthy in that it showed mills had begun to anticipate higher prices and had been somewhat active in fixing the price of cotton they had bought for the 2022-23 season. That will be the case again next week.

    Higher prices are a “lead pipe cinch.” Let’s go another 800-1000 points and then see.

    Give a gift of cotton today.

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