Better Days Ahead for Cotton Market?

The ICE Dec contract had another up week, post last week’s modest breather, gaining 136 points to finish at 74.04. Last week’s partial carry, measured by the spread between the Dec and Mar contracts, is again inverted.

US export data for the week ending July 21 reflected strong demand for US stocks at a volume weighted average price of 73.50, basis Dec. Appreciable rainfall has not yet fallen across West Texas, but we remain hopeful for our friends that call that area home.

US currency tanked late this week, adding fuel to the bullish fire at which the specs are gathering. Internationally, although rain has occurred across India, its most concentrated areas of production are currently at a deficit with respect to moisture requirements associated with optimal yields.

A sign that one is in the middle of a true bull market is the spinning of potentially negative information. For instance, although China has said that it will extend this year’s reserve auctions into late Sept Vs the originally planned late Aug (and may yet extend sales into Oct), the market has taken the bullish side of this news to heart rather than the nearby bearish implications.

Of course the bearish implication is that more readily available reserve cotton will ultimately displace some imports of raw cotton into China, while the longer term bull aspects are that demand is rounding second base and also that this season’s production in China may well be overestimated by USDA.

The US producer appears to have grown a full set of horns. While the current forward contracting basis is historically attractive, producers seem confident that better days are ahead in the market, the basis, or both. Given the number of ways the 2016 crop could get smaller, it’s hard to make a strong argument that they’re wrong.

That said, it’s also hard to argue for any producer moving into August without at least 50% of their production hedged. At the moment, Dec or Mar puts look like the safe bet, which leaves open the possibility of selling higher quality recaps this winter.

For next week, the standard weekly technical analysis for and money flow into the Dec contract remain bullish, but the market also remains in overbought territory. But a market can remain overbought for some time during a true bull run. If US export sales for the week ending July 28 resemble those put forth this week, we could be headed higher – especially if it does not rain across West Texas during the interim.

Source: Louis W. Rose IV, The Rose Cotton Report 

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