“The bull is still fattening” – AgFax

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The big bull rages, bellows, tramples and begs to be fed. It has been furiously charging higher over the past three weeks, breaking through all general price resistance and sailing above price targets. It is a worldwide phenomenon. India is experiencing record cotton prices; Chinese prices rose more and more. Same with Brazil.

Speculators returned to the cotton market in full force just as the mills began activating call fixings and for the third straight Friday prices rose by triple digits and saw limited trading. The call sell fixings caught an empty market of sellers and, coupled with speculative buyers, the market was overwhelmed, leaving prices rising.

All contracts set record closes on the week and essentially set three consecutive days of record closes. The price trend continues to be up and in this case it is almost pointing up, due north. Certainly, this cannot be sustained, and a major correction is due.

However, a correction does not bode well for easing the “dollar plus” scenario for cotton. Dollar cotton will continue in the old crop 2021-22 contracts and will be maintained in the new crop 2022-23 contracts. Let’s hope the shrewd US producer didn’t miss that December 2023 contract, or Red December as the market lingo calls it (or even Pink December), is trading above 87 cents. Certainly, we know that many international producers have asked about this price.

Based on the existence of a price gap in the range of 127 to 128 cents, the May contract now calls for 140 cents. From there, up to 148 cents is in play. December has almost reached its target of 112 cents, and the next target is 119-125 cents. Still, there are suggestions that prices need to pull back. Yet Texas and Oklahoma are parched.

Very bullish call sells versus call buys marked the market and carried prices beyond expectations – and some doubted the importance of this very historic fundamental. Some, including the cotton trading community, have even worked overtime to hide this market indicator from the cotton farmer.

Unfortunately, the textile mills were caught far too short in a market where demand was strong. Market prices fled from factory fixing as factories wrongly continued to “bet on arrival”. They lost, and they lost big. The ratio of call sales to call buys, as wide as it has been in 2022, has always proven to be a great indicator of price action.

Some have questioned its value because, as they say, the use of options skews the ratio and the fact that many international growths are now trading. In fact, these factors make using the ratio a powerful fundamental tool that is much more appealing, but really no less important. The existing ratio, now 8.2 to 1, is at a season high, but other factors are starting to outweigh its predictive power as the marketing season wears thin.

At such high price levels, “price gaps” start to appear in the charts. It’s a sign of the times, so to speak. Currently, market participants, for the most part, are speculators or struggling traders. So the prices are off the charts, pun intended. Wild market swings are inevitable. The fundamentals took their course. They delivered a market closer to 150 cents than 100 cents. Price discovery has been completed.

The prices have a little more room to go up, which means that the factories have to do more fixing. In addition, the 2022 harvest faces a potential weather catastrophe. Either will drive prices up. The market is likely to get a dose of both.

However, this week was the first sign that spinning mills were starting to “loudly” complain about not being able to pass on higher cotton prices. Spinning mills are under pressure and that’s usually the first sign of trouble, a price problem. The mills openly hint that they are ready to consider that they have to think about changing their fiber mix.

They will use the current blend for a month, or two months, or even three/four months, but their time between buying the cotton and selling the yarn is extremely short. In their minds, it’s even shorter if yarn stocks pile up and profits disappear.

Retailers continue to suggest that their sales are strong, but they warn that instead of 15% sales growth, year over year, they are looking at sales growth of only 6-8% for 2023. Still, that’s still a healthy level compared to pre-coronavirus years. Also, consumers, especially the American consumer, have money. Thus, neither a slowdown in cotton consumption nor a slowdown in consumer sales is on the horizon. However, a potential cash crunch based on inflation and energy prices is expected in 2023 and 2024.

The outlook for nearby cotton is bolstered by excellent demand for export sales and US cotton shipments. The most recent weekly shipments were the highest for the landmark 2021-22 year. Also, we now find that apparently traders/cooperatives have under-reported export shipments.

US Department of Commerce data for cotton loaded on ships is considerably larger than data on cotton shipments collected from merchants/cotton cooperatives. About half a million bales or more may have been shipped from the United States than is currently reported by the USDA. It must be good to have two sets of books, one for the bulls and one for the bears.

The bull is still in the fattening process and the impending planting problems facing most US acres cannot go unnoticed. You would say correctly, “Well, they always get enough rain to plant the crop.” Yes, they do, or they did. However, it should also be noted that soil conditions are drier and drought is more prevalent than in all previous years. Something will give–it always does.

Currently, December contract traders are betting on drought. If so, December futures are undervalued. Such high prices potentially force factories to look for alternatives.

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