O.A. Cleveland Weekly Cotton Report: 8/5/2011

No matter the price level, the dog days of summer are still the dog days of summer…They just come every August with the extreme heat and when growing conditions can still have a major impact on crop size. The market’s attempt at a major move in either direction is dulled by the realization that ample time remains for the crop to make major improvement or to sink sharply backward. The dollar mark held this week, but the ten cent trading range between 95.00 and 105.00 is still the order of the day. Short term technicals continue negative and the possibility of trading in the very low 90’s remains very possible. The market wants to move lower, regroup and begin another charge. Yet, the potential Chinese buying for its government owned reserve may have already limited the downside. Similar activity in the corn market three weeks ago certainly provided a boost to that market, thus demonstrating the importance of Chinese buying for its strategic reserve.

The market had expected China to begin buying cotton for its national strategic reserve, but most expected that it would delay such activity until at least the peak of the harvesting season. Instead they announced that they would begin purchasing local cotton on September 1. This activity has the potential to add as much as 30 to 45 cents per pound to the market. Yet, one would expect the Chinese activity to very prudent.

This will remain a “behind the scenes” bullish factor in the market throughout the year. Yet, a potentially intermediate bullish factor was dismantled this week as the weekly cotton On Call report indicated that December call sales were coming somewhat in line with call purchases. Mills apparently used last week’s downturn in prices to fix the price of some of the cotton they have bought for later delivery, signaling that they view the high 90’s as a pricing point for 2011-12 purchases.

USDA crop estimators were in the fields this week surveying the 2011 crop. The August supply demand report will include USDA’s first crop estimate based on an objective survey. Thus, the crop estimate that will be released in the August 11 report will be based on crop conditions of the first week in August. Most estimates are in the 14.2 to16.3 million bale range, although I have heard of some on either side of that range. A crop size above 16.0 million bales would be viewed as bearish. The West, Midsouth and Southeast crops have all made some progress, but remain as much as ten days to two weeks late in some locations. The Southwest crop, devastated by worsening drought conditions, is only getting smaller. However, last weeks rainfall that threatened to cause both yield and quality losses in South Texas and the Coastal Bend regions failed to materialize.

Commodity prices will remain “strong” despite global economic concerns. Demand, without question, has stretched the resources required to operate a smooth sailing economy. As such, commodity prices will remain elevated until more land across the globe has been brought into production. From time to time grains and oilseeds will have the advantage over cotton. Yet, cotton will continue to be highly competitive and should it fall out of favor in any given year, the result will be a challenge of the two dollar level once again and causing cotton acreage to explode as occurred this season.