Thompson on Cotton: Strong Rally Shows Market Still Has Life

    Most all commodities posted significant gains last week with cotton being no exception. Once again, buyers outnumbered sellers as supply side worries continue to mount. Though volume was down from the prior week, such concerns had bulls driving cotton prices to within 100 points of their post WASDE report high of 119.59, closing the week at 117.68, a gain of over one and a half cents.

    The late-week rally came as crop losses seem to be accumulating across the Midsouth and Southeast due to excessive rainfall. Even more fearful, the Tropics have come alive with currently four known disturbances making a path this way and are likely to intensify over the coming days.

    Uncertainty remains as to whether production or demand will suffer the greatest losses. In the U.S., it’s obvious the shorter crop will more than offset any declines in demand. Since trading on the New York futures is more focused on our domestic situation, look for the December contract to move higher.

    However, with a not so bullish global picture, pressure may come to bare on new crop prices in the months ahead. USDA projects world production to be 117 million bales compared to a trade consensus of 115 million.

    A greater discrepancy is found in world consumption where the USDA estimates 119 million bales with the trade projecting world use of 113 million bales. If the latter is realized, it will be difficult for prices to remain at current levels.

    Market traders watch weekly export sales with keen interest as it’s a good indicator of actual demand. This week’s figures took everyone by surprise. In their infinite wisdom, USDA decided to make changes to a reporting system that has been working effectively for decades. For whatever reason, weekly export sales of 1.9 million bales, a volume never before been seen, was reported.

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    Immediately, in hopes such was true, the market shot up 300 points. Upon admitting their error, USDA retracted the report and the market fell to unchanged for the day. As of this writing, the correct numbers have not been made available. For the market’s sake, it is vital their system gets debugged before next Thursday.

    Where to from here? Friday’s strong rally gives us greater confidence the market still has life. Lending further support, managed funds through August 23 added to their net long position which now stands at over five million bales. Still shy of their historical high level by some five to six million bales, more buying is possible.

    The market needs a kick in the pants to move it above 1.20 and beyond. Preferably, we would like to see this come in the form of growing demand. However, in the meantime, we will let a dwindling crop and stable demand steer prices.

    We would encourage you to take advantage of current prices for it was only a few months ago we saw the market plummet 50 cents seemingly overnight. Beware there are outlying factors such as a strong Dollar, changes in consumer spending, and China’s faltering economy to name just a few which could sour this market triggering a similar sell off.

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