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Weather activity will jolt the market
26
Jul '08
New York cotton futures worked higher on the week mostly in response to lackluster trading as well as the lack of success the bears have had in taking prices lower. The 70 to 76 cent trading range will likely prevail over the coming two months; subject to any weather activity that would jolt the market. The market must deal with the heavy surplus of U.S. and world carryover and will likely attempt to move lower before moving higher.

Yet, the ever tightening world supply on the 2009 horizon will support the distant contract months. The market finds good support at 72 cents, but the possibility of a sell off to 67 cents is a real possibly. Once that is out of the way then the 75 to 78 cent target will be in place. Yet, the next two to four months will find the market under pressure of the largest carryover of world stocks in history, as well as a near record U.S. carryover.

Weather issues in India, the crop size in China and crop conditions in Texas will provide price leadership through the growing season. (Of course, the grains, oilseeds and crude oil markets can whip saw cotton on any given day or week.) Just as it did two years ago in passing the U.S. in cotton production, India is on track to pass China within a few years and become the world's producer of cotton.

However crop conditions in the major Indian growing regions have been very poor due to lack of moisture this season. While this week's rains did provide some relief, they were not as widespread as needed. Thus, the market will play close attention to crop events in India. The increasing Indian production has moved them to the forefront as a major exporter of cotton, mostly at the expense of the U.S. Any reduction of the Indian crop will mean a one to one ratio increase in U.S. exports.

For now China can claim to be the world's largest producer and consumer of cotton. The increasing importance of improved diets emphasized by the central government means less area will be devoted to cotton. It is likely that USDA will adjust lower its estimate of the Chine crop. However, such an adjustment is unlikely over the next two months.

Texas, expected to harvest about half of the total U.S. crop, and the primary U.S. supplier of cotton for medium and high end yarns, has taken the role as the principal growing region in the U.S. Thus, crop conditions there, an in West Texas particularly, will have a say in price direction.

With only two more reporting weeks left in the marketing year, U.S. export will fall short of its expected export target and carryover stocks are expected to rise to 10.4 million bales in the August USDA supply demand report. Export sales for the week ending July 18, were a net 55,100 RB.

Upland sales were 54,900 RB and Pima totaled 200 RB. Shipments were 258,600 RB of which only 600 RB were Pima. Primary destinations for Upland were China (110,100 RB); Mexico and Turkey. Sales for 2008-09 were 95,900 RB. Primary destinations were Turkey (17,500 RB); Indonesia and Thailand.

U.S. textile mills used cotton in June at an adjusted annual rate of 4.4 million bales, 500,000 bales lower than in June 2007. Annualized 2007-08 usage to date is 4.5 million bales compared to 4.8 million for last year.

Near term activity will be two sided with a bias back to the 72 cent range. However a small and likely short lived rally is attempting to raise its head. Longer term, the 2009 December contract could pass one dollar.

O.A. Cleveland

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