Cotton prices on a roller coaster
Cotton prices were on a roller coaster this past week. Falling to prices not seen since before Christmas. The early part of the week there was an across the board meltdown of commodity prices. It was impossible to sort out a single factor influencing cotton as all markets seemed interconnected as an aura of deflation dominated.
However, on Wednesday, cotton futures, after being down six of the previous seven session a whopping 1,085 points from the high of just seven sessions earlier, December, rallied to triple-digit gains. Cotton held on to those gains and tried to add to them following the USDA crop report Friday but things got more than a little sticky –in fact, they got downright wild as the week came to an end.
After rallying early Friday following the report, cotton traders found themselves out on a limb all by themselves when grain prices dipped. Cotton took a jarring three cent tumble before catching hold just above Thursdays lows. The break took cotton right to the edge of a technical cliff as move below Thursday's low would have attracted an absolute plethora of technical selling. But instead, Dec cotton came back impressively and actually ended the week at 7359, up 1 point for the day but still down 176 points for the week.
In this months report, USDA took a conservative approach, leaving plenty of room for adjustment in Aug and Sept when their numbers will be based on actual survey. They used 10-year avg abandonment and three-year average yield to project 8.1 million acres for harvest off 9.25 planted. This put the US crop at 14 million bales – down 500,000 from the assumptions a month ago. World production was cut sharply with 1/3 of that coming in the US and the rest from India. Nearly all the cut in the world usage came from China as USDA made allowance for the global economic slowdown.
From all indications, export sales picked up sharply this past week. This weeks report could possibly indicate 300,000-400,000 fresh sales. Freight rates seem to be a one-way street as bunker fuel surcharges put upward pressure on shipping rates. It has been pointed out how extremely uncompetitive West Coast shipments of US cotton are to China when compared with India, which is right next door.
The Ag Market Network, normally presented two days after the USDA crop report, has been rescheduled for Friday, July 25th at 7:30 am central time. As is usual the July broadcast will emanate from New York City.The panel will be joined by Joe Nicosia, CEO of Allenberg and president of the American Cotton Shippers Association.
From a technical perspective, the bears still have the upper hand. Friday's rally took us to the 9 day moving avg and a 38% retracement of the jarring seven day break from 8259 to 7086 but fell just short of the high of Tuesdays big break from 7533 to 7086.
So there is no choice but to view the rally as a correction in a bear move but stochastics while still in a sell mode are starting to look like they might want to flatten. The three cent break from Fridays highs came very close to affecting an outside day reversal to the downside but close doesn't count and the lows held well. A close Monday above 7381 would be constructive and hint at an attempt to take Dec back towards 76.60 . However, it is highly likely that cotton will take its early cue from from outside markets.
Today's headlines will surely dominate early activity as traders mull the influence of the IndyMac Bank failure and the Fed and Treasury steps to shore up our two mortgage giants on all commodities and it can't be good. The three stock indexes are already in solid bear territory down 20 percent from their highs as they hit two year lows Friday.
Swiss Financial Services