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There’s Still Hope in This Bullish/Bearish Market

By Dr. O.A. Cleveland
 
The November supply demand report shoveled out enough new information to send the market limit up. Yet, two days after the report, the market floundered and slid into the low 78 cent area, much like the response to a bearish report. Such is the impact of the cotton tariff battle with China.
 
Raw cotton, that is “bales of cotton,” continues to get hammered via price, while Chinese cotton textile goods manufactured from non-U.S. cotton gush into the U.S. untaxed and unaffected by the U.S. tariff. This is the primary reason why the big market bear sits astride the cotton market – and I was a big supporter of the tariff. Yet, as long as the U.S. Trade office allows non-U.S. cotton to totally substitute for U.S. growths, ICE futures prices and the price paid to farmers will remain under pressure. China will remain free to continue to inundate the U.S. market with foreign-produced cotton goods.
 
Thus, the trading range of 75.50-80.50 cents remains in place, locked in until some new fundamental is uncovered. Of course, any news of a resolution in tariff issues will boost prices, while a continuation of the tariff will keep the market range bound.
 
A continued decline in the Indian crop should point prices slightly higher. While the Indian crop was lowered 1.0 million bales this month, many think another one million bale decline is necessary.
 
USDA’s November supply demand report reduced the hurricane-damaged U.S. crop 1.35 million bales, with principal reductions in Georgia and Alabama. The U.S. was estimated at 18.41 million bales, down from 19.76 in October.
 
U.S. exports were lowered from 15.5 million bales down to 15.0 million, a half million bale reduction. Domestic consumption in the U.S. was lowered 100,000 bales, down to 3.3 million. Domestic carryover was lowered 700,000 bales, down from 5.0 million to 4.3 million. This significantly lower carryover level will help support prices in the current trading range and will ensure an increased planted acreage of cotton in the U.S. for the 2019 crop year. Nevertheless, the U.S. will continue to be somewhat hamstrung to meet its export forecast, as merchants will be hard pressed to meet the quality standards mills are expecting to receive.
 
Too, the continued wet harvesting season will likely reduce the final U.S. crop, possibly another 100,000 to 150,000 bales lower.
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