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Don’t Ignore the Gift Horse. Feed the Market!
By Dr. O.A. Cleveland
 
The cotton market, just like a year ago, continues to demonstrate its desire to move higher. Technicians call the market a strong buy, but the trader in me says it is time for some price cleansing.
 
Prices eased above the psychologically important 80 cent level, basis the March contract, this past week, but settled then just below 78 cents. Despite the price advance, U.S. growths remain the most competitively-priced cotton on the market, and export demand is strong. However, as much as many growers hope for a jump to 85 cents, a price selloff is in order. Nevertheless, the market has exhibited some traits of panic buying, as mills have both chased prices higher and have increased their price fixations. This could spark some panic trade selling, which would fall into the hands of bullish speculative buying.
 
Additionally, On-Call cotton sales remain extremely bullish and are positioned to push the market to the 85 cent mark, basis March. This would set up a scenario that could bring about export cancellations. However, with alternative growths limited, U.S. export cancellations should be limited. Too, the On-Call sales position is reemphasized, as it is extremely bullish.
 
It is noteworthy that this week’s price advance occurred as On-Call sales increased and On-Call purchases decreased. The incremental changes were small, but definitely it does raise a bullish flag. If not indicative of higher prices, the action suggests the market is well supported in the upper 70 cent range or higher.
 
New York futures prices are being nudged higher by the large imbalance between on-call sales and on-call purchases – but also by the realization that both the Indian and Pakistani crops are smaller than expected, and that the world economy has generated a greater demand for cotton. Too, the smaller-than-expected high qualities out of Brazil are also acting to maintain a very favorable basis for U.S high qualities. Additionally, Australian stocks have been reduced, and this will continue to support a strong basis for U.S. high quality supplies.
 
Thus, with world production declining along with a surge in world consumption, world carryover stocks are declining and may fall as low as 85-86 million bales – some 3-4 million bales less than the current USDA estimate.
 
Nevertheless, let’s not get caught looking a gift horse in the mouth. Prices are at a profitable level for growers. A rising cotton market is asking to be fed. Feed the market by selling into it.
 
How often does a grower have the opportunity to sell physical cotton with New York in the upper seventies with the additional benefit of being offered a strong cash basis as well? The answer is very seldom. And then, considering the additional phenomena of also facing a strong increase in U.S. carryover, the answer is seldom. I am tempted to say never. But then, all things are possible.
 
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