Grab Hold. The Bulls Are Running!

I was wrong. The highs are not in. The cotton bull, with freshly sharpened and longer horns, has broken out.

The old crop May and July contracts are attempting a run to the 83 cent mark. The new crop December says it wants to see 78 cents. I still find difficulty in buying into those forecasts, but be prepared.

Note the phrase “attempting a run.” The bull probably only has short legs, but he is still strong.

Speculators and large funds continue to flock to the cotton market at historic levels. The mill on-call sales, though impossible to move higher, do not even have a rear view mirror anymore. If export sales maintain the current pace for another two weeks, then sales would exceed USDA’s export forecast for the 2016-17 year – and there are five months remaining.

The only bearish factor facing the market is that everything is bullish – everything. That, in itself, merits a caution flag.

Large funds and algorithm traders have pushed cotton to the point where it holds the third largest level of managed fund longs for all agricultural markets, trailing only sugar and soybeans and even larger than the big corn pit. The level of managed funds with long cotton positions has even surpassed the historical big boys in silver. It is very notable that the funds have not even blinked at any price selloff and, in fact, continued to pour money into the cotton ring.

Exports – driven primarily by the record high quality U.S. crop, the Indian demonetization, and the cash basis of U.S. cotton vis-à-vis other growths – have maintained U.S. sales at the on again/off again 16 million bale level we have mentioned since October. Granted, I have, on each occasion, said that could not happen. Yet, the pace has been there, and it remains very conceivable. Southeast Asia, China and the Subcontinent simply have not backed away from buying U.S. cotton.

It is difficult to project U.S. exports above 13.7 million bales, but that is a million bales above the current USDA estimate. An earlier USDA forecast that U.S. carryover would be 5 million bales now looks more like 3 million bales. The caution flag does emerge as carryover levels suggest prices in the 85-plus cent level. Price rationing of exports could encourage export cancellations.

Mill on-call sales continue to increase. Logic, history, and common sense clearly dictate a decrease is in order. On-call sales did decline a minuscule 582 contracts in the latest report. But the past week’s export sales, again over 500,000 bales, will likely push the on-call position higher in the next report.

The difficulty for any market bear is that the price of over 8 million bales of cotton must be fixed on either the May or July contract with the deadline for action in mid-June. Again, both the old crop and new crops markets are asking to be fed. Both crop years are now in the upper 20% of the historical price range. It is time to price.