By Dr. O.A. Cleveland
Professor Emeritus, Mississippi State University
Special for Bayer CropScience
The cotton market offers no rest for the weary as it continues to run over anything or anyone that dares to put a lid on it.
The May contract has taken over as the lead old-crop month and also assumed the price leadership role with its climb above two dollars. The July contract was also two dollars as of this writing.
The new-crop December contract continues to stall at 130.00, but also finds excellent support between 122.00 and 124.00. Both the December 2012 and 2013 contracts remain content to trade on either side of the one dollar mark.
Mill buying for immediate delivery, coupled with mill fixed price purchases for the 2011-12 marketing year, have provided solid support to prices. The past month’s market activity is likely a foreshadow of price volatility and direction between now and August.
The in-country cotton basis remains very strong. This is an indication of excellent demand for cotton. Export sales for the week ending February 24 were surprisingly strong given that price activity during the week was at the two dollar level. Net Upland sales totaled 403,300 running bales (RB); 153,300 RB for immediate delivery and 250,000 RB for the new-crop marketing season. Pima sales for both years totaled 7,900 RB. Chinese mills and trading companies were very aggressive buyers. In fact, merchants report Chinese interests are very willing large scale buyers of 2011 crop, basis-fixed price December at the going market price.
The week also found mills increasing their level of prices fixations in both the May and the July contracts. This fixation activity (buying of futures) will continue for the next three months and will be very supportive of bullish activity.
Additionally, U.S. domestic mill demand for the month of January was an annualized 3.9 million bales. Thus, look for USDA to increase its estimate of the 2010/11 marketing year domestic demand to 3.7 million bales – 200,000 bales higher than its current estimate.
Next week’s release of the March supply and demand report should see USDA reduce its estimate of both Chinese and Indian production. Too, with an increase in Chinese consumption, USDA may likely reduce its estimate of the August 1, 2011 carryover to as low as 38 million bales, down some four million from its February estimate.
While price volatility will continue to be the order of the day, there are few, if any, reasons to suggest lower cotton prices. The bulls will remain in control.