Cotton prices bounced back and forth all week as the market continued to look for some significant indicator in which it could sink its teeth. This is of course the similar pattern it has followed for months and will likely continue to follow until the crop size is better determined. Prices will likely work the 74 to 77.50 cent level as the market waits the late October-November period of peak harvest in the Northern Hemisphere.
The bearish factors include a record world carryover, sluggish demand, and the approaching harvest making the new crop readily and easily available to the market.
Bullish factors include the drought reduced crop in India and the U.S., China’s decision to buy new 2012 crop production (while selling old crop to mills) and in effect maintaining their high level of stocks and supporting world price, the scarcity of quality cotton around the world and in particular the U.S. Other bullish factors include India’s decision to limit exports and significantly increase the size of its domestic textile industry and record high grain and oilseed prices that draw productive land from cotton plantings in favor of expanding grain and oilseed acreage.
We have said it a thousand times already and will say it several more thousand – the cotton market will continue to be supported by the oilseed and grain complex. Those markets control all agricultural trading. Cotton prices must continue to chase the 85 to 100 cent level to maintain something akin to a stable production base. Exactly where that is, I do not know, but it is becoming apparent the global 2013 acreage will be down as much as 20% while some countries will be down as much as 25-30%.
The macroeconomic factors continue to receive considerable attention in the international financial press and fund managers and large speculators are rightfully fixated on that news. Certainly the U.S. has begun to experience an increase in the demand for cotton (as evidenced by increased housing starts over the past few months) as U.S. mills have noted increased orders. Indian mills, enjoying a labor advantage, have continued to increase their activity as more and more international investors pump brick and mortar money into Indian textile operations.
This demand, coupled with questions surrounding global crop size and other bullish factors has kept the New York December contract near the 75-76 cent level for a month. Thus, the near term up trend in the market has kept the managed fund longs in the market. They are not adding to their longs at present, but those that have been short have reduced their holdings.
My earlier thoughts that the market could make a solid run toward the high 80s were weakened this week with the improved monsoon in India. However, the majority of the Indian crop has already seen yield reducing drought, but that crop is now receiving some beneficial showers. Yet, some areas, due to the very unusual monsoon season, have actually been flooded out. Mother Nature has yet to reveal her plans for the Indian harvest, but we can be certain that very little Indian cotton, if any, will be available for export. The market has failed at 77.50 cents a number of times. Let the battering ram continue and it will punch through that resistance point. However, the 80-81 cent level will offer another significant barrier.