By Dr. O. A. Cleveland
Let’s not be surprised the nearby March closed below 60 cents this week. I only wish I could find something positive in the market, but it is just not in the cards. Let’s hope my analysis will soon prove incorrect, but I do not think so.
The market took it on the chin just after the release of the most bullish export report of the marketing season – another bullish report, only to be followed by a bearish response, as mentioned last week. In the absence of demand, my fear is that the nearby ICE contract will continue to fall another 500 points, down to the mid-50s. Other problems here and there could drop it to the low 50s.
It is all about the absence of demand. Everything else is just window dressing, including the old Chinese stocks, the U.S. market standard of SLM 1-1/16 inch staple being inferior to the industry (world) standard, the U.S. price being tied to spot market averages and differences, or even U.S. prices being tied to the CCC loan.
The cotton world has no semblance to the one that existed when such terms and calculations were introduced. It is all about demand, and none of us, me included, are jumping in front of that train that must be stopped. Someone will have to.
The Secretary of Agriculture’s decision to abandon the Cotton Belt even caught me off guard. Don’t those politicians read any history? It makes me love the old Fram oil filter commercial – “You can pay me now, or you can pay me later.” I am not taking political sides here. I would have guessed both sides of the aisle would have jumped at the idea of limiting government exposure and saving treasury funds at the same time.
For a moment, let’s go back to a bearish response to a bullish report. U.S. exports sales on the week were very positive (cheap prices sell more cotton) and, on the heels of the report, the market was down triple digits. Net sales of cotton totaled 273,400 RB, with Upland totaling 251,600 bales and Pima sales totaling 10,800. Shipments of Upland were 233,500 RB – a marketing year high. An excellent report, yet still significantly lower prices.
One chart pattern, and the primary link that keyed my bearishness, surfaced in the Chinese ZEN September contract. A very bearish downward sloping trading channel formed. When taken in conjunction with recent Chinese announcements, it is a clear indication that record low Chinese prices are on the forefront. That bearish chart pattern was the basis of my bearish flip last month. Moving upstream, the bearish pattern fits with the stagnant yarn market that has formed in China, as yarn sales are currently nil. Lower raw cotton prices are necessary to revive yarn spinning there.
The USDA February supply demand report will be released February 9, and USDA is faced with a difficult task.
First, the Indian crop and world carryover must be adjusted lower. Other crops will also be adjusted lower. U.S. exports may be adjusted lower. Yet, with lower prices in front of us, U.S. sales, and thereby exports, are likely to increase during the coming months. Stocks are lower, but the target is moving more rapidly than usual. My principal concerns – following the dominos – are 1) demand, 2) price and 3) plantings.
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