By Jeff Thompson, Autauga Quality Cotton Association
In a spec- and fund-driven market, one must expect the unexpected and be prepared to take the good with the bad. Last week’s trading activity was a perfect example. Early on, short coverings and new speculative buying fueled the recent rally, briefly driving prices beyond 65 cents while closing Thursday at 64.85, its highest level since February 26.
Then came Friday’s profit taking where 2.5 cents were lost, closing the week at 62.36, down only half a cent from the week before.
Let’s look a little closer in an attempt to make some sense of it and see what might lie ahead in this week’s trading. The early-week rally was largely due to an ever-declining 2020 crop accompanied by decent export sales.
The portion of the U.S. crop considered good to excellent fell from 49% to 45%. More telling, nearly every reporting state showed a decline, indicating the shorter crop extends well beyond the Southwest. Expect little improvement if the rainfall forecast for the next several days is accurate.
Taken at face value, export sales appeared bearish, with old-crop net cancellations of 68,500 bales. However, with the 2019/20 crop marketing year ending, this is most likely a shifting of inventory into next year.
New crop sales were good at 130,800 bales bringing total 2020/21 commitments to one million bales more than at this same time year. China, alone, accounts for nearly three million when their unshipped purchases are added to their new crop purchases.
Probably Reasons The Market Retreated
Considering this slight improvement in fundamentals, Friday’s action was somewhat unexpected. Once again, macro influences seem to carry greater weight than fundamentals at present.
When the market broke 65 cents on Thursday, the trading volume collapsed, leaving too few buyers to keep it at this level or higher. Then on Friday, as the market drifted below Thursday’s low and Wednesday’s close, volume picked up and the selloff began.
Fueling the selling: renewed tension between the U.S. and China, a slight rise in the dollar, less-than-stellar unemployment numbers and, more importantly, the lack of Congressional action on a new stimulus package.
The commitment of trader’s report issued Friday was very impressive ,though it only reflects Spec and Fund activity through August 4. Even so, if not for Friday’s action, this would have further encouraged the bulls. The funds hold their highest net long position since February 18 when the economy was still running on all cylinders.
Where do prices go from here? Although the crystal ball is a little cloudy, don’t panic. Several events will occur this week which will greatly influence the market.
These include the crop conditions report, USDA’s release of August supply/demand numbers, export sales, and trade representatives will meet late in the week to discuss Phase One trade deal progress.
We will be watching all of this closely as there remains the potential for a move back to 67 to 68 cents. However, it will require favorable news on all these fronts along with steady shipments throughout Oct/Nov/ and Dec. to offset any harvest pressure.