Monday, December 2, 2013
The large storm that moved through the southern portion of the U.S last week may have damaged portions of the Cotton crop awaiting harvest. This allowed prices to rally to 1-month highs just prior to the Thanksgiving Day holiday before profit-taking selling capped weekly gains. Although most of the U.S. Cotton crop has been harvested, any damage to the remaining crop would reduce the supplies available for the U.S. to export in the coming year.
Cotton futures have been mired in a bearish trend, as global supplies have overwhelmed demand. The lone bright spot this year was the steady buying by China, which was accumulating Cotton to expand state controlled reserves. Analysts estimate that China now has enough Cotton in reserve to meet domestic demand for nearly 18 months! However, on Tuesday of last week, China announced that it would begin auctioning off some it its Cotton reserves. Normally, this news would be viewed as extremely bearish, however traders note that the minimum floor price for the auction is over 60% above current world prices, and interest from domestic mills should be minimal. Going into 2014, traders fear that Chinese mills may not need to import much Cotton, and instead may rely more on state-owned reserves to meet their requirements. If true, this could keep a ceiling on any cotton price rallies, especially if large Chinese Cotton imports do not materialize in 2014.
Looking at the daily chart for March Cotton, we notice prices have become range bound for most of November, as the market seems to have found a near-term floor above 77 cents per pound. The 14-day RSI has moved out of oversold territory, and is now reading a more neutral 44.69. The "spike" low of 76.65 made on November 22nd looks to be support for March Cotton, with resistance found at the November 6th high of 80.52.
Mike Zarembski, Senior Commodity Analyst