O.A. Cleveland Weekly Cotton Report: June 16, 2011

The macroeconomic lesson was the key to the cotton market this week as the sharply increased value of the U.S. dollar along with troubling economic news from across the globe sent cotton and most other commodities sharply lower.  Cotton has now lost some 17 cents from the four week high.  The slowing demand out of China, coupled with glowing official comments regarding  a very promising Chinese crop, have offset the disastrous crop conditions in the U.S.  This is likely a short term downfall with the market trading at the lower end of a corrective phase as it prepares to move into the July futures expiry period.  The 115.00 level, basis December futures cannot be ruled out, however, the support near the120.00 cent will likely prove strong enough to hold any further price breaks.    

For the first time in three months weekly U.S. export sales were reported as a positive number. That is, after 12 consecutive weeks’ cancellations and buy backs were less than actual new sales.  Net sales of Upland were just 10,200 RB, but the bulk of the total sales were to China.  Too, this week’s drop in prices will likely generate good sales.

The market has likely overdone its run to the low side as U.S. crop concerns will take a more dominate place on trader’s minds within the next two weeks.  USDA will not take its first objective view of the U.S. crop for another six weeks.  Until then official comment from USDA will be totally subjective.  Yet, most industry observers are already expecting USDA to lower its estimate of the 2011 U.S. crop.  The high side appears to be 17 million bales while the low side is just 14.5 million bales.  The devastation in Texas has been seconded by expanding poor conditions in Georgia and other major areas of the Southeast.  The exceptional drought conditions in Texas and the Southeast can be viewed at http://drought.unl.edu/dm/monitor.html  The cotton crop’s overall poor start is further expressed by USDA’s weekly crop condition report indicating that almost half of the crop in both Georgia and Texas is rated poor to very poor.

While the industry is anticipating USDA’s June 30 Plantings Report, the report will be somewhat ambiguous in that acres that were actually planted to cotton and later zeroed out by insurance claims will still count as “planted acres” even though such planting no longer exist.  Thus, the report will not be a clear indicator as to how much cotton is actually growing and, thus, having a chance to produce.  It is likely that both the August and September NASS crop reports the bulk of those acres that were planted and then abandoned will be identified. 

Demand is more of a problem that initially expected, but crop size will be smaller than current forecast and the mid summer trading session will favor the more positive side of prices.