Thompson on Cotton: Managed Funds Watching for USDA Numbers

    Compared to that of the previous week, last week’s market activity, though subdued, was encouraging. In much need of support after giving up over 14 cents and crashing through both the 100-day and 200-day moving averages, the 50-day MA at 101.60 held firm this week stemming the bleeding for now. Despite on low volume, trading prices rebounded to close Friday at 104.78 for a gain of 163 points.

    A lack of economic news and the anticipation of today’s WASDE report had traders playing it close to the vest. This week should be much different as a host of data will be released including the consumer price index, retail sales, and, most notably, the September WASDE report. The latter is certain to influence prices as the supply side bulls and demand side bears look for answers.

    For months, as if playing tug of war, these two have been at a standoff. Today’s WASDE report could bolster one side or the other. Though USDA has been known to surprise us, major revisions like those seen in August are not expected. With final planted acreage higher than earlier estimated, a slight increase in U.S. production is possible. However, crop losses in the Midsouth and Southeast continue to mount as relentless wet weather patterns persist.

    Presently, in many locations, our field observations reflect losses of up to 200 pounds an acre in cotton that once had two to three bale an acre potential. Not to mention, flooding in Pakistan is expected to reduce their crop by a million and a half bales while losses in South America could total half a million. As a result, industry predictions have USDA lowering world production by another million and half bales to 115.6 million.

    Consumption numbers will garner the greatest attention as they seem to be most in question. The current projection of 119 million bales is certainly too high given declining global economic conditions. USDA’s adjustment to world mill use may impact prices this week more than any other single factor as industry expectations vary widely from 118.4 million bales to 114.5 million.

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    Going forward, we will be able to better monitor export sales as USDA is reverting to their original reporting system. A combined report for those missing weeks will be issued on September 15. After which, it will return to the normal reporting schedule of each Thursday.

    Where to from here? The week of a WASDE report is always nerve wracking. One must come to expect the unexpected. The managed funds will be closely watching the latest estimates for some clarity to the uncertainties of supply and demand. Thus far, these Funds are maintaining a net long position of slightly over five million bales. Though, as imagined, some profit taking occurred during the recent sell off, their actions gave no hint to a mass exodus.

    Also willing to stand their ground, are mills who appear to be in no hurry to fix previously purchased cotton despite a double-digit decline in prices. Why would they have given the questions surrounding this crop. However, there are currently over nine million bales of on call sales, which at some point will provide market support as seen the last couple of years. Technically, last week’s market actions speak volumes as prices held firm at over a dollar.

    Even so, hold on tight because the ride this week could get bumpy as USDA estimates are revealed and sized up against the expectations of traders. Fundamentals still favor higher prices but based primarily on supply, they will face resistance all along the way until demand is more clearly determined.

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