Cotton rallied to about 150 points above the low that was made in the minutes after last weeks report. Whatever else one makes of this market, it can be stated emphatically that it does not believe that the US will have a 6.1 Mb carryout and a 34% ratio. There is ample precedent for this type action, one example is winter/spring of 2015. Cotton drove down to a low of 57c in Jan and 60c in Mar, as the anticipation and implementation of the China destocking program took place. End stocks waffled between 3.0 to 3.8 Mb, while the ratio ranged from 22% to 30%. The market was trading much below fair value with the idea that Chinas program would eventually swamp prices.
There is much belief in trade circles that world consumption and/or missing stocks will cause US exports to be well above 14.5 Mb, pushing end stocks back down to 4.0 Mb or lower in coming months. Export demand from last Mar to end of July was brisk and unseasonably large, resulting in this years sales being 2.3 Mb higher as the market year began than year ago. That 5 month period came at a time when export demand normally cools down. Since 1 Aug, demand this year vs last year is roughly the same, with year ago slightly better.
After the roll week, the US has sold 2.775 Mrb, vs year ago at 2.945 Mrb. The averages from then to now are 200 krb and 210 krb respectively. The pace of sales will be the driving force behind price discovery from here on. The USDA has stubbornly held to a ratio of available supply rather than use a method of comparing current sales vs the target. A 60% ratio of total supply gets 14.5 Mb. Factoring in the loss of 200 kb, exports would be 14.37 Mb. However, comparing current sales to previous years and the relationship to final, exports can be calculated to be much higher, from 16.0 Mb to 17.4 Mb. The market believes exports are much higher than where the USDA has them. We tend to take a wait-and-see attitude, as sales patterns come in bursts and more often than not the early sales do not match final exports.
The chop and slop continues, as Mar retested the 38.2% correction level today, then backed away. Open interest has finally begun to contract, moving lower after last weeks peak of 237k. Re Mar, a minor trend line shows support at 6870, and there are 3 intraday lows at 6835. The cotton vs corn ratio using new crop contracts is at a 5 month high. Cotton vs soy is at a 2 month high. The 55 day avg has put a lid over the spot month since May, with all closes below that level other than the Irma spike. Todays high in Dec was right at the 55 day.
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