Cleveland: Don't Be Fooled By Breakout Movement in the Cotton Market
While last week saw a breakout to the topside in cotton, that break was shortlived. Dr. O.A. Cleveland highlights the forces at work in a changing market.
February 26, 2013
Cotton prices moved higher on the week as May experienced a breakout to the topside. However, the break was short lived and cannot be counted on at this juncture. The market was initially higher on a strong upward pressure on Indian cash prices, but was pulled back by a midweek bearish day in all markets, including both commodities and equities (stocks). This coupled with a strong increase in the U.S. dollar put the market on a bit of the defensive. The dollar has moved to a five month high.
The markets appeared to be caught up in rumors of a large hedge fund going under as well as bearish comments by players in the international markets. The breakout in the May contract, up to 85.24 cents, could not hold and frustrated the bulls while Friday’s upside close frustrated the bears. Too, the price breakout was not accompanied by an increase in open interest; thus, you are cautioned that price activity is likely to see increased volatility during the March delivery period. A retracement back to the 78 cent level in the nearby contract has to remain on the table.
As speculative funds took profits and exited the market during the midweek rumor mill activity, textile mills were active buyers. The underlying pent up mill demand that has been under the market the past six months and has now revealed itself.
Thus, one should expect the USDA to again raise its forecast of U.S. export demand. U.S. exports are now forecast at 12.5 million bales, but on track to reach 13.0 million bales. Weekly sales of Upland were a net of 171,600 RB. The primary buyers were once again those countries where USDA must look at increasing its consumption estimates: Turkey, South Korea, Vietnam, Bangladesh, and Thailand. An additional 38,200 RB for delivery in the 2013/2014 marketing year was also noted. Pima sales totaled a healthy 14,800 RB. Total commitments expressed as a percentage of expected sales are slightly ahead of the five year average.
USDA forecast 2013 U.S. planting at 9.8 million acres, some 800,000 acres more that of the National Cotton Council’s intentions survey of growers. Additionally, USDA also forecast production at 14 million bales compared to the NCC forecast of 12.86 million. The principal difference in the estimates of the institutions was methodology. The NCC estimate was based on an actual survey of grower members. The USDA estimate was based more on historical plantings and year to year changes with respect to price ratios.
Prices will attempt to work higher, but there will be some give and take. The USDA intentions survey will get under way within the next two weeks, thus the March 30 Planting Intentions Report and then Mother Nature will begin to reveal some of her decisions regarding weather.