January 20, 2012

After spending most of the month trending higher, cotton futures treaded water this week, albeit the market was limit up at one point on Tuesday. Too, the market moved through the entire week maintaining its slightly bullish tone. The March contract settled the week 313 points higher. The technical trend is decidedly up, projecting both near term and intermediate term bullishness. Prices pushed higher this week on news of stronger than expected exports, a Chinese agency's estimate that the Chinese crop is three million bales smaller than USDA's estimate, and the weak U.S. dollar. Additionally, certificated stocks remain low and this is on trader’s minds as first notice day for the March contract is less than a month away.

The market has now approached a critical juncture as the nearby March contract will have to ease near 101 to 103 cents or risk falling back to the low to mid 90’s. The new crop December rallied above 94 cents before settling the week at 93.91. Look for the market to back and fill in the 90 cent to 103 cents range for the next month or so. The December contract must continue to hold in the mid 90’s if producers are to be enticed to plant cotton.

Weekly export sales for last week were a net of 189,400 RB for 2011/12 delivery. About half of those sales were made to Chinese mills. Too, Pima sales at 6,700 RB, were some 20 percent above the monthly average. Export sales, as well as futures trading will likely lag a bit during the coming week as China celebrates the New Year with a week long holiday beginning January 23. China did release its tabulation of country of origin cotton imports for the month of December. They imported 3.6 million bales. Some 50% of this was Indian growths, the U.S. accounted for 14% and Brazil supplied 11% of the total. Additionally, China announced that buying for the national strategic reserve stood at 11.1 million bales.

The long term technical outlook does remain somewhat bearish, meaning that the long term charts suggest prices will move into the mid to low 80’s between now and December 2012. We have worn out our welcome commenting on the excess world carryover. Yet recall that these stocks were accumulated in just one season. However, if 2012 plantings are in line with current intentions worldwide, then supplies will dwindle. Additionally, should the U.S. remain just somewhat dry, another weather reduced U.S. crop, coupled with the double digit percentage drop in world plantings, may well wipe out most of this season’s increase in world carryover. December must touch the one dollar mark between now and plantings if the market is to prevent as much as a ten percent drop in U.S. plantings.


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