By Jeff Thompson, Autauga Quality Cotton
Although small, we did get a market bounce off the Fibonacci 50 percent retracement level at 103. The remainder of the week saw little price movement as traders jockeyed for position ahead of Thursday’s WASDE and export sales reports.
To our good fortune, each was viewed as neutral to slightly bullish allowing the market to hold onto its earlier gains. For the week, March and December futures advanced two cents settling at 106.23 and 89.75, respectively.
There was a growing fear this month’s WASDE report would show a reduction in U.S. exports as there appears to be no short-term resolve to our shipping dilemma. However, in their monthly supply/demand estimates both exports and domestic mill consumption remained unchanged with production revised upward though rather insignificantly.
The highlight of the report, and most bullish, was a decline in world ending stocks of 1.2 million bales to 86.9 million. This was a result of a slight revision in beginning stocks, a small decline in world production, and, more importantly, an increase in world consumption. World consumption is estimated to be a record setting 124.3 million bales.
Such strong demand is largely responsible for prices being at current levels. Compare this to September 2020 when world use was estimated to be only 112.7 million and cotton prices were trading near 65 cents.
The most bearish item to come out of the report were Chinese imports being reduced 2.6 million bales from last year. Before taking this as a sign of declining demand, bear in mind they have steadily been drawing down from their reserves which is a sure sign of just the opposite.
U.S. export sales increased for another week reaching 408,700 bales when combining both current and new crop sales. China, Turkey, and Vietnam were the primary buyers accounting for almost 75 percent of these purchases.
Shipments, though slightly exceeding 100,000 bales, continue to be a grave concern when considering 360,900 bales per week need to be shipped to meet our export estimate. Sales commitments to date are within 700,000 bales of those of last year at this same time while shipments lag at this time by over two million bales.
The most recent Commitment of Traders report is reflective of spec and trade activity through Tuesday of last week, December 7. Given the prior week’s seven and half cent selloff, it was no surprise to see spec funds had further reduced their net long position which now stands at seven million bales.
This is their smallest position since August 3 when they were at 6.7 million and significantly lower than their high of 9.6 million bales on October 5. On the other hand, the trade was covering a portion of their shorts to the tune of 700,000 bales as mills took advantage of lower prices to fix a portion of their on-call purchases.
The trade still holds a sizeable net short position of 14.7 million bales that represents a great deal of buying power and market support.
Where to from here? Throughout this bull market, cotton prices have been driven by spec buying, China purchases, and a large volume of unfixed on call sales. With the first two factors waning a bit, the latter will be called on to provide support at least until an event(s) entices the specs to buy back into the market.
Until such time, look for prices to trade in a narrow range at current levels given this underlying support. Nonetheless, the long-term outlook is for higher prices if demand continues its torrid pace.