New York futures continued a consolidation phase this week, attempting to stabilize from losses suffered two weeks ago. December did climb above 59 cents for a brief period, but generally worked only a two cent range. Deteriorating U.S. crop prospects, earlier than normal Chinese harvest, and excellent export demand for U.S. growths highlighted the market during August.
The path of least resistance appears higher, but the increasing availability of local cotton to Chinese mills may cause Chinese buying to slow. China's early harvest stands to push local prices lower.
Following the price collapse of two weeks ago, U.S. export sales for the week ending 8/16/07 totaled 400,500 RB with upland sales totaling 397,600 RB and Pima totaling 3,900 RB. This very large weekly sale level can be attributed to either the underlying demand below 62 cents basis, December futures, and/or that mills feel the severity of the price collapse was overdone. Either way, the weekly sales suggest an increase in demand.
Normally, this could only be read as a bullish signal for the market. Yet, the earlier than normal Chinese harvest, coupled with the rapid delivery of local new crop cotton to Chinese mills, may keep prices under pressure until the normal harvest season price pressure of the remainder of the Northern Hemisphere crop puts a cap on prices.
This downward prices pressure, if it materializes, would keep a lid on domestic Chinese prices, making it more favorable for Chinese mills to delay cotton imports. Additionally, while the Chinese crop has been hit with more that its share of weather problems this season, it is far too early to suggest their crop will be weather reduced.
China and Turkey were the major buyers of U.S. cotton during the weekly reporting period, with China buying 141,500 RB and Turkey buying 111,300 RB. Increasing concerns suggest that Turkey will be in the market for more U.S. cotton this year owning to their drought reduced crop. Too, with New York under 60 cents, and the value of the dollar slipping against many major currencies, U.S. cotton only gets cheaper and cheaper.
Weekly exports totaled 324,900 RB with upland shipments totaling 310,900 RB. Pima shipments totaled 14,000 RB.
The drought, and heat in excess of 100 degrees, has taken its toll on the U.S. crop. While a portion of the Texas crop was hit by too much rain, most of the Memphis Territory crop has suffered from heat, humidity, and drought. USDA’s September supply demand report will likely see the U.S. crop adjusted some 300,000 bales lower.
Nevertheless, the market has not reflected a declining U.S. crop. No doubt the outside markets are weighting on cotton. However, those markets in general and the other agricultural markets in particular, have regained a good portion of the losses suffered two weeks ago.
Thus, the concern is that that while U.S. exports have been strong—and will be again next week-the industry is very cautious regarding both the size and earliness of the Chinese crop. China is the home of demand!
The U.S. consumption report for July, released this week, showed mills consumed cotton at an annualized of 5.0 million bales, marking the fourth consecutive month of annualized consumption at 4.9 million bales or more. While this was significantly better than expected, it made little more than a footnote in the marketplace.
Chinese demand must hold, but December is working is way back toward 62 cents.
