Spurred by another round of Chinese fund buying, and underpinned by extremely strong sales of stocks from the Chinese reserve program, the New York ICE cotton contracts blew past near-term resistance and back into the mid-70s.
Two weeks ago, we suggested that the upcoming USDA supply demand report would be neutral and the market would drop, yet only to reverse to and jump higher.
Jump higher it did this week. Wildly higher.
Prices fell lower than expected a week ago, and that should have been an indicator of the strength that this week’s move would have. It was considerably more than I expected. I am reminded of the good gentleman from Lula, MS, Macon Edwards, who stated, “Those willing to climb the flagpole of price prediction are prepared to show their true character.”
The 69-cent price barrier appeared too tough to break above, but prices sailed through that and all the way above 73 cents before falling on Friday (September 23) and easing back down to just above 70 cents for the weekly close. The market shot up some 450 points during the week, only to lose some 160 points on Friday. Yet, the bulls had a great week, and the market showed it still had the moxie to climb above 72 cents.
Not surprising, the 72 cent level is likely just too high, too soon. The world crop, while facing various problems, can actually still be improving. Demand is growing, but is very precarious once futures prices touch the 72 cent mark. In fact, Chinese mills have shown some determination to switch to acid-based chemical polyester when cotton moves above 70-72 cents. Yet, the fire is beginning to build under 72 cents.
The 66.50 level has become critical in terms of establishing the low for the remainder of the season. That level must hold to maintain the bullish attitude of the market. I am of the opinion that the lows are in, and the market will now attempt to break above the hard shell price resistance between 72 and 73 cents.
Technically, a challenge of the highs above 77 cents is not ruled out. Yet, there is a mountain of work that must be done to approach that rarified air. Thus, the trading range now becomes 66.50 to 73.00 cents. A break above 73 cents will set the stage for a test of the 77-78 cents highs.
Again, I caution you not to “wait” for that price level, as it is far from certain. Yet, I would be remiss if I did not remind you that some market technicals project a trade as high as 80 cents. Please, should the market reach that level, then be already 95 percent priced.
Remember, the current price run and the earlier run to the high 70s was associated with the very successful Chinese reserve sales. Those sales are due to end on September 30 and will not be renewed until a yet-unannounced 2017 date. Chinese reserve sales will likely reach 12 million bales by next week, proving to be more successful than any expected. The Chinese government will have succeeded in selling between one fourth and one fifth of all its cotton reserves.
Granted, other fundamentals helped fuel the run into the 70s, and some of those will continue to affect the market. Mother Nature is dumping too much moisture on parts of the big Texas crop and hindering a successful harvest. Parts of both the Brazilian and Australian cotton areas have been too wet to complete field work (Southern Hemisphere crops) and stand to delay plantings.
The Indian crop is likely larger than the recent USDA report – 500,000 bales or more. However, we continue to firmly believe that USDA must make major adjustments to its level of Indian stocks. Prices are simply too high to mesh with the USDA estimate of a 14 million bale Indian carryover.
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