After gapping higher the previous week, the cotton market rose further during the holiday-shortened week, closing at its highest weekly close in two months. Little major fundamental bullish news accounted for the gain, aside from Texas weather concerns, increased speculation about new forthcoming Chinese import quotas, and a strong weekly export report.
The week began quietly, with many traders either on vacation or on the sidelines in anticipation of the pending USDA Prospective Plantings report. Reports from India indicated the late monsoon had finally begun in earnest. Monday saw rainfall amounts surpass the normal daily mean rainfall for the first time in a month. While the cumulative progress of this season’s monsoon remains well behind trend, the intensification in precipitation was a welcome sign across the country. Nearby cotton prices in the U.S. closed up a modest 11 points on the day.
Tuesday, the cotton plantings report from the USDA was within trade estimates, with total cotton acreage estimated at 9.05 million acres, down 4% from last year. While this level is mildly higher than forecasted in the prospective plantings report issued in March, the number surprised few. Nearby futures traded in a 300-point range on the day after the release, but settled up only 63 points from the day before.
Wednesday saw a dramatic limit-up move, but appeared based on little fundamental news. The strong move up came on increased volume, and all major moving averages were violated, as was resistance at 59.71. Aside from developing crop progress and condition concerns in Texas, there seemed little to drive the market higher. At the start of last week, less than one-third of total cotton acres across the cotton belt were at or beyond the squaring stage, the slowest pace of progress for this week in more than a quarter century of record keeping. In particular, the Texas crop is hindering the advancement of squaring across the Belt. While the development of the crop remains behind trend, the condition of this year’s cotton crop is eroding over recent weeks and is lagging this point last year. As of last week, only 42% of the crop was estimated to be in good or excellent condition, versus 44% a week ago and 45% at this point last year. Again, Texas is to blame, dragging down the national average. Just 28% in this state is listed in good or excellent shape, the fourth-worst share for this week in over twenty-five years. Without acceleration in the progress of the Texas crop or improvement in the condition of the crop, it may be difficult for the outlook for this season’s crop to improve markedly in coming weeks. With little other major fundamental news to drive the market, nearby prices closed up 300 points at 58.63 cents per pound, the highest close in a month.
Thursday, net U.S. export sales came in at the top of the range of reported expectations and shipments easily surpassed the weekly average needed to achieve USDA's 2008-09 forecast, echoing our outlook over the last few months that the export forecast remains too low. While China remained the largest destination for shipments last week, volume to Mexico jumped to 46,494 bales, the highest in more than a year. Cotton prices closed the day and week at 59 cents, up 37 points from Wednesday and up 411 points from the week before.
After closing higher every day last week, cotton reached its highest weekly close in six weeks, but still does not appear technically overbought. Despite the recent volatility, we continue to see a market confined to a broad range between 55 and 63 cents. Summertime trading is always accompanied by weather scares and this July should be no exception. Whether late monsoons in India, dryness on the North China Plain, spotty rains in West Texas or early hurricanes in the southeast U.S., there is always weather to keep us company—and on edge—during July and August. The fundamentals of supply and demand appear tighter going forward, just not yet.
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