Last week’s market activity was wild with daily trading volumes in excess of 90,000 contracts for two consecutive days, a near all-time high for cotton. Not surprising with all that was taking place, the GSCI roll, December options expiration, some grower rolling, and spec selling. In addition, fundamentally, it was influenced by a supply/demand report and export sales figures. All the while prices continued their downward spiral, falling to a level not seen in almost a year, a low of 74.77. However, after shedding ten cents over the past six weeks, cotton prices found a much-needed tourniquet at week’s end even though December futures closed Friday at 77.32, for the fifth losing week in the past six. The question now becomes will the bandage hold and bleeding stop?
Missing has been the mills who usually step in providing support by either fixing prices on existing sales or making new purchases when prices fall this steeply. As for fixations, mills seem to be patiently waiting to see how low this market will go. On the other hand, for the past two weeks we have seen strong export sales. With prices at current levels, we are competitive with Brazill who up to now has captured U.S. market share, especially with China. In October alone, they exported 225K tons of which China purchased 162K tons, their largest single monthly total on record. For the marketing year, Brazill has exported 517K tons of which China purchased two thirds. U.S. exports last week totaled 395,000 bales only slightly lower than the previous week’s marketing year high. In the past two weeks, the U.S. has sold nearly a million bales with China the buyer of two-thirds. As Brazilian and Australian inventories run low, we should see more favorable weekly export sales.
Most disappointing was USDA’s November Supply/Demand report. Expectations were for them to significantly reduce world production, especially where China, India, and Pakistan are concerned. The resulting decline in world ending stocks, on the heels of strong weekly exports, would be just what this market needed to rebound. Instead, production in these countries were left unchanged and subsequent increases in the U.S. and Afghanistan raised world production by 850,000 bales. In turn, with world consumption lowered by half a million bales world ending stocks are projected to increase 1.6 million bales from the previous month‘s estimate. Domestically, we saw a similar pattern whereby U.S. production was raised to 13.1 million bales while exports were unchanged but domestic use was lowered by 100,000 bales thereby raising U.S. ending stocks 400,000 bales to 3.2 million.
Where to from here? There is no doubt the cotton market is in an oversold position. However, that doesn’t mean we have seen the bottom. The managed funds will have a lot to say about this. Friday’s CFTC report was delayed due to the holiday. So, it will be later today before we see where they currently stand, though it’s a safe bet they’ve further reduced their long position. Fundamentally, a bearish WASDE report lends little encouragement for the specs to change course as we had hoped. In addition, economically and geopolitically the environment remains disturbing. Fed Chairmen Powell in comments last week madeclear the Fed will continue to be hawkish in bringing inflation down to their two percent target. Also, with the Middle East still a powder keg and another possible government shutdown looming, uncertainty reigns over the marketplace. As we all know, markets frown on uncertainty. This week we will be closely watching both the consumer price index and producer price index for any signs of declining inflation. Technically, March has now become the cover month as its open interest exceeds that of December. Finally, a reminder anyone with on call bales-based December must decide to price or roll by the 21st. Considering the current environment, if given the opportunity to price above 80 cents given basis and futures I would do so. Otherwise, a roll to March would be advised.