O.A. Cleveland Weekly Cotton Report: 9/30/2011

Cotton prices eased above the dollar sign on the week supported by strong export sales and increased concern regarding the Pakistani crop.  However, the increasing value of the U.S. dollar caught the bull on Friday and pushed the market off its weekly highs.  Additionally, the USDA Grain Stocks report sent grains limit down on Friday.  The cotton ring took note and traded lower with sympathy pains.   Prices remain trapped in the 95-106 cent range, but continue to suggest movement outside the ranges.  Yet, demand will have to further improve if the market is to move above the top side of the range.  With peak global harvesting coming in the next few weeks, the market will encounter producer hedging which will pressure prices to the downside.  Yet, if mills continue to add on-call sales prices will have an excellent opportunity to stabilize in the mid 90’s. 

The next level of price support is the 97-98 cent range, but there is considerable support at the 93-94 cent mark.  Should that fail, and I am already on record of suggesting it will not fail, then the price risk is all the way down to the 52 week low of 82.82 cents.  The upside will have to punch through 119 cents to get the bulls excited again.  A rally of that magnitude does not appear to be in the cards; thus, there is concern that the prices will grind lower into the December first notice period.

With world stocks forecast to increase by almost eight million bales this season, the recent increase in demand will have to continue if prices are too be successful in challenging the immediate target of 109 cents.  Chinese, Indian and Pakistani mills report a firming in demand.  Yet, the buying has not translated to a big increase in U.S.sales (more on that later). U.S.growths remain uncompetitive in the current environment with Indian supplies providing the primary competition.

The dichotomy was that weekly export sales of U.S.cotton were exceptional this week, registering a net of 222,700 RBs in Upland sales and shipments were a strong 82,600 RBs.   Yet, since the 2011 crop is not competitive in the world market it was thought the sales represented the cleaning out of old crop (2010) inventories before the new crop arrives in force.  The 2011 crop sales to date, at 6.9 million bales, are over 2 million RBs below the same week a year ago.  However, this is in line with the USDA export forecast.

With new fundamental information absent the marketplace, cotton prices are left to follow trends and react to news in other agricultural and financial markets, as well as general economic news across the globe.  Expect this to continue over the following two weeks as it is near the time it will take for flood waters to recede from the Pakistani crop and then obtain a good estimate of crop size.  Too, all Chinese markets, including the Chinese cotton markets, will be closed the entire coming week in observance of a national holiday.   Thus, it should be expected that export sales during the coming week will be off.  

The market will continue to battle within its trading range, but with a downside tilt as we move through the harvesting and ginning period.