After giving up 16 cents since May, the cotton market’s 2-cent rally last week was encouraging. Friday’s close of 64.54 lacked the momentum to break resistance at 65 cents, but was a gallant attempt, nonetheless. We will now wait to see if this advance has legs to stand on fundamentally or if it will be short-lived, a product of market consolidation.
The specs, still historically short the market, are pondering the same thing. Their reaction to it will largely dictate where prices go in the near term.
Speculators remind me of deer timidly sipping water from a mountain stream, their heads on a swivel, eyes always searching for danger. It’s good to note when scared they don’t run off one at a time but instead quickly depart as a herd.
They have become very skittish as fundamentals are beginning to show early signs of improving. This gives cause to the latest weekly CFTC report, which had them as small net buyers for the first time since last March. For now, they remain stream-side nervously watching how things unfold, while we desperately need something to spook them.
Where Exports Stand
Much of the talk last week centered around renewed U.S.–China trade negotiations and the possibility of a tariff-free purchase of U.S. cotton by China.
This heavily influenced the rally. Even though the potential purchase volume was minimal, it did stir some hope discussions may once again be heading in the right direction. However, due to the lengthiness of this trade battle, there have been consequences that will curtail any sustainable impact a signed resolution might have on prices. But, to a nervous speculator, an agreement between the two countries would be a reason to view cotton demand differently.
Last week’s export sales report was better than expected. A combined 374,000 bales were sold primarily to Vietnam. As good as sales were, shipments were equally disappointing. At the current pace, we will fall over 600,000 bales short of the USDA export estimate resulting in the largest U.S. ending stocks in 10 years.
Also, almost 3 million bales of unshipped cotton are vulnerable to cancellations and reduced prices. New crop sales now total a respectful 4.7 million bales.
Production – Plenty Of Variability
As for production, this year’s crop has been a more significant variable than usual, considering its wide range of maturity. Still, with only six weeks before last bloom date, we are beginning to get a better handle on yield potential. Rainfall has been very random and isolated throughout much of the Cotton Belt.
The Southwest and Midsouth have fared much better where this is concerned with their crop reflecting such. Conversely, much of the Southeast is amid a severe drought with intense heat.
No doubt, the crop in this region has gotten smaller over the past few weeks. Without a change in weather patterns soon, crop potential will further shrink.
So, you can see why those deer may not have bolted just yet but will be quick to spring into action at the first sign of positive change. Until such time, the low 60s looks to be a bottom with a run into the higher 60s possible if improvements on the demand side of the equation are detected. The next few months will hold the answer to a lot of these questions, so watch closely for pricing opportunities as events unfold.
In closing, the best news of the week came as USDA announced the details of the Market Facilitation Program for the 2019 crop.
Payment rates ranged from a minimum of $15 per acre to a maximum of $150 per acre with 50% of this to be paid to producers in mid-August. Fortunately, cotton producers across the South received some of the highest per county payment rates. Sign up began July 29 and will run through December 6. For more detailed information on the program, I encourage you to go here.