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Market Report from OA Cleveland

July 2013

After being in a depressing mood all week cotton prices rallied, gaining 251 points during the final two trading days. Thus, the new crop December contract settled some 110 points above the prior week’s close. This gain was even more surprising given the excellent rains that covered near 100% of the extreme drought parched Southwest crop as well as a decline in managed funds, an event that typically pulls prices lower. It was suggested the rainfall was the most widespread in some four to five years. The gain was based on a large part to December mill fixations and export sales made during the week. Those sales will be announced in next Thursday’s weekly cotton sales report released by USDA. The market tried to work lower all week, but uncovered excellent demand as it approached 83 cents. The long term 81/82 cent support continues to add to its strength and the trading range remains solid. Again, this should hold to at least the first two weeks in August.

The rainfall in the Texas, Oklahoma, New Mexico and Kansas crops was very beneficial. However, for much of the dryland crop it was too late. The irrigated crop was the big winner as much of the irrigated acreage in that region depends heavily on rainfall for supplemental moisture to have any opportunity to push yields to the upper end of historical highs. Thus, while the moisture was a net benefit, without question, a good portion of the moisture was on dryland acreage that had already been adjusted to zero yield by insurance adjustors. Nevertheless, the grain sorghum plantings will be the major beneficiary; therefore, providing a boost to farm income. December will remain under pressure, but such pressure has not been too heavy for the market to fend off in the past. That said, a number of analysts have suggested that the December contract could possibly slip as low as 77 cents. That slippage is not in my forecast.

With respect to lower prices, I note that the market has withstood attack after attack at the 81/82 cent support. Too, DO NOT underestimate the number of wild cards that remain in the Chinese deck, the home of the original and first “deck of actual playing cards.” As we all know China has been, and remains, a very active buyer of cotton in the international market. The Chinese government, by all indications, will not hesitate to step in and purchase large volumes of cotton to add to its strategic reserve should the price dip below 80 cents. They have proven to be buyers time and time again on any drop below 84 cents. Typically, they buy in even larger volume as the market approaches 82 cents.

Adding support to the market are two additional supply factors. The expected return of very hot and dry weather to the Southwest speaks to the continued concern of the Texas dryland crop. Additionally, world prices and price ratios with respect to competing crops suggest that 2014 planting in the U.S. could fall to 9.5 million acres. Back to the music world…hold on to what you got!

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