In such an environment cotton cannot stray too far from its traditional ratios to food prices without risking a significant drop in acreage. Take soybeans for example, where the current ratio to cotton has stretched to over 18-to-1, which compares to a typical ratio of around 11-to-1.
US export sales maintained a decent pace last week, as 136’100 running bales net were sold for the current marketing year and another 69’700 running bales were added to the 2012/13 tally.
This brings the two-week total to over 500’000 bales in sales and almost 630’000 bales in shipments. The shipment number is particularly impressive and it helps to alleviate fears of cancellations. For the season total sales now amount to around 12.6 million statistical bales, whereof 9.9 million bales have so far been exported.
While export sales were quite constructive, the fact that West Texas received abundant and widespread precipitation this week was clearly a negative. Some stations reported accumulations of over 5 inches and the region is off to one of its best starts in recent years.
With the cotton belt doing quite well as a whole, it should reflect in a higher crop estimate in the upcoming USDA report, as abandonment is likely going to be lower and yields higher than average.
So where do we go from here? Last week we predicted the market would trade in a range between 65 and 78 cents and we are still holding this view. After the market tested the lower end of this range on Monday, it has since rebounded sharply and further short-covering in July may even propel it towards the high 70s.
However, while growers are not interested in selling or hedging their crops in the mid-60s, they will most likely seek additional protection from here on up. We feel that the market will eventually run into a wall of selling, which should stop the current momentum in its tracks. We therefore view the current strength as a selling opportunity.
Plexus Cotton Limited