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Is that it for the cotton rally - or just a blip in a bull market?

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Where now for cotton prices?


Commerzbank restated a bearish take on prices issued earlier this week, saying that “the global cotton market should show a small supply surplus in 2018-19”, as relatively elevated values attract sowings.


“This trend suggests that cotton prices will fall further in the next few months.”


The bank said in a report on Wednesday that “there can be no talk of any shortage of cotton”, with inventories forecast by the US Department of Agriculture as rising by 22% over 2017-18, with “the significant production increases in the US and India playing a primary role here”.


And for 2018-19 “there is no sign of any tightening, at least not in the US,” where sowings are seen recovering further.


“We expect prices to correct.”


Prices fall


Certainly, futures trod the downward path on Friday, standing 1.2% lower at 77.39 cents a pound in late deals in New York, for March delivery, back below their 40-day moving average.


That extended a decline from levels of 84 cents a pound and above reached earlier this month, before a downbeat US export sales figure of 67,684 running bales of upland cotton for the week to January 18 - down 75% week on week.


But is this just part of a temporary lapse in a bull market?


One-time setback?


Ron Lee at McCleskey Cotton is more upbeat, seeing the current setback as a temporary lapse “in a bull market”.


OK, the export data for the week to January 18 were disappointing but, look under the bonnet, and that could be down just to a one-time effect.


It “just happened to be the week that 240,000 bales were statistically cancelled”.


Add those back in and the export data look a lot more healthy – indeed, back to levels released on Thursday, for the week to January 25, which sent futures up again.


Water shortage


In fact, importers may not have much hope.


“The Indian basis is the only cheaper growth of exported cotton in the world than the US and it remains to be seen how much of it is actually for sale,” Mr Lee says.


And as for ideas of larger US sowings this year, that requires the co-operation of Mother Nature.


In west Texas, the core of US cotton output, “all growing areas are now more than 100 days since their last drink of water.


“And while we have had a few showers around, the moisture situation in south Georgia is far from ideal either.


“Every cotton growing area of the US is showing up on the National Weather Service Drought Monitor in some form or fashion.”


‘Still seems overwhelming’


Nor are the worries over the amount of cotton bought by mills “on call”, ie to be priced against futures (up to the July contract for 2017-18) going away.


While the on-call total held against the March lot fell by 9,461 contracts week on week, overnight data showed, much of that looks to have been rolled forward to May and July contracts.


In short, many mills appear to have kicked the can of pricing problems down the road.


And while overall “mill commitments against the current marketing year contracted to around 10.7m bales”, said Louis Rose at Rose Commodity Group, that “still seems overwhelming”.


Peanut indicator


Nonetheless, for new crop, Mr Rose painted a somewhat bearish picture, currently seeing US cotton sowings up 7% this year at 13.47m acres, a figure he says translates into a crop of 20.3m-22.4m bales, factoring in average abandonment and yield rates.


As to whether these materialise, it is worth keeping an eye on, besides the weather, prices of alternative crops, notably corn, but maybe also peanuts too.


“We did see peanut offers tick up slightly over the last week, with a reported $400-a-tonne offer on limited tonnage,” McCleskey Cotton’s Mr Lee says.


“Don’t think that was simply a coincidence with December cotton trading above 76.00 cents a pound.”

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