Cotton futures held their weekly gains despite the seemingly bearish USDA October supply demand report issued Friday morning. December closed up 65 points for the week. Yet, the more impressive action was that the March, May and July contracts all closed more than 100 points higher on the week.
While the December 2008 contract also settled higher, the current crop March, May and July futures did gain ground on the new crop December. Without question, I remain very bullish the new crop December 2008 contract. However, we are most likely no more than six weeks to month away from the current crop contracts beginning a slow, but gradual move higher.
The December contract seems intent holding the 62 cent mark. Nevertheless, the 66 cent level appears to have just as much price resistance as the 62 cent level has support. The potential for a drop below 60 cents has all but dissipated. Too, should the market fall below that level, such would be extremely short lived.
December will likely spend the majority of its trading time near the 64 cent level. Thus, mills should demonstrate considerable interest on any price tick below 64 cents. Likewise, growers have the ability to hold cotton in the loan with the expectation that the back months will offer a premium.
However, most mills have demonstrated a firm attitude of avoiding new purchases or even price fixations with December above 62 cents. Their time to make purchases at current or lower prices is, however, also dissipating. As suggested, there will be little to no harvest pressure on prices in six weeks.
Generally, the October supply demand report offered few surprises. The initial interpretation was that the report was bearish, but daily trading showed otherwise, although major changes were made in both the China and U.S. numbers.
USDA increased its estimate of the U.S. crop 350,000 bales, up to 18.15 million bales. Exports were unchanged at 16.7 million as was domestic consumption at 4.6 million. However, beginning stocks were lowered 200,000 bales, down to 9.5 million bales. Ending stocks were increased 200,000 bales to 6.4 million.
In a policy change, USDA accepted the Chinese cotton estimates provided by the NDRC (National Development and Reform Committee) rather that its historical use of other Chinese government estimates. The NDRC has proven to have its hands around the cotton situation more so than any other governmental agency. USDA made changes back as far as 2004-05.
The Chinese crop was estimated at 35.5 million bales, up 3.0 million from last month. Imports were unchanged at 15 million bales. Chinese consumption was increased 1.5 million, up to 55 million bales. However, in changes that trace back to 2004-05, beginning stocks were adjusted higher by 3.9 million, up to 18.7 million bales. Chinese ending stocks were adjusted higher by 3.1 million bales, up to 17.7 million.
World beginning stocks were adjusted upward by 3.3 million bales to 60.3 million. USDA's estimate of the world crop was also raised 3.3 million bales, up to 120.3 million. World consumption was increased 1.7 million bales, to 129.5 million. Thus, world ending stocks were elevated to 55 million, up 3.4 million bales.
These numbers amplify my comment of last week that December 2008 contract cannot increase high enough fast enough to generate an increase in cotton acreage in 2008. The world cotton market will be dominated by the soybean and wheat markets.
Net export sales for the week ending 10/4/2007 were, as expected, poor. Sales totaled 154,700 RB with Upland sales at 151,400 RB and Pima at 3,300 RB. Primary buyers were Turkey (83,700 RB); Indonesia and Thailand. Again for the third consecutive China was absent as a primary buyer. Primary buyers of Pima were India (2,000 RB); Pakistan and Thailand.
Export shipments were 273,600 RB with Upland being 266,500 RB and Pima at 7,100 RB. Upland shipments to China led the way (81,000 RB); followed by Turkey and Mexico. Shipments of Pima were primarily to India (2,000 RB); Pakistan and Thailand.
The October report should not be viewed as bearish as the market had fully anticipated them for nearly two weeks, in some cases longer. A four cent range, 62-66 cents will dominate price activity.
