Bears Impact Market, But Long Term Still Bullish

By Dr. O.A. Cleveland

Cotton prices slid all week, with the exception of two minor higher days at midweek.

The important 68 cent level was breached in August 19 trading, opening the way for another test of the 65 cent level, basis December. The breach at 68 cents could actually find support at 67.50, but that support is no more significant than the 68 cent mark. Too, given that speculative funds continue to be long in spite of an 1100 point sell-off does create major bearish vibes should speculative funds decide to exit their positions. While much of the price advance has been lost, at least half of the longs entered the market as low as 65 cents.

Thus, the current support may prove to be sufficient. Nevertheless, the weekly activity did prove to violate both the 50 day and 200 month moving averages, both of which have been excellent recent indicators of cotton price movement.

Thus, the near term technical perspective has turned negative. Nevertheless, the longer term outlook remains bullish.

Yet, a price rally in excess of 10 cents in little more than a week, followed by a sell-off of a like amount, cast doubt in the market. Most analysts, if not all, feel the USDA estimate of world carryover is somewhat bloated. But until the Department makes adjustments, world traders will continue to point to the unmanageable stocks situation around the globe, with particular emphasis on Indian and Chinese stocks.

Chinese reserve sales have continued at a solid pace, yet the bullish impact of the sales has disappeared. Sales have slowed to only about one half of the previous pace. Yet, total sales from the reserve remain fully on track to reach the target originally set by the government program. In that respect, the program actually remains just as market supportive as it ever was. The fact that daily sales have slowed to only a little more than half the prior rate does not keep in perspective that sale terms were changed such that the sales will last a month longer. Thus, in terms of volume sold, the reserve sales remain on track to seal 10 million bales – the implied goal of the Chinese Finance Ministry.

The more important fundamental news is that world stocks outside of China are set to decline once again. This is important, as it is those stocks that are viewed as the “exportable stocks” that can be used to feed the important Southeast Asian and Subcontinent textile industry – the principal regions for textile consumption growth.

As for potential U.S. stocks, the currently estimated 15.9 million bales U.S. crop continues to face multiple difficulties. The vast Southwest acreage on the Texas High Plains and Rolling Plains has received beneficial moisture, but the regrowth process has created fruit shed at a time when any new bloom will not have time to mature to a harvestable boll. Likewise, the very large Mid-South crop faces additional moisture, high humidity and excessive heat on a daily basis. This weather will lead to both quality and yield loss. Crop development is advanced far past the normal stage, making cotton very suspect to boll rot.