Howell: Cotton market plummets amid speculator-fund rush for exits


Extreme volatility has swept cotton futures to a five-session loss from high to low of 981 points or 10.5 percent.

Benchmark December shed 761 points or 8.3 percent on a closing basis for the week ended Thursday, finishing at 84.18 cents, its lowest close since July 17. It hit a new seasonal high of 93.72 cents on Friday, Aug. 16, and fell to a 25-session low to 83.91 cents on Thursday, Aug. 22.

December ran into hardened resistance at the 93.93-cent peak set on March 15 on the then spot May 13 contract. What started as moderate profit-taking quickly mushroomed, activating stop-loss sell orders as long speculators and funds rushed for the exits.

The selling appeared largely technically based. Analysts knew of no fresh news that would have accounted for such a break. Tight nearby supply concerns had encouraged speculators and funds to pile onto the long side during the prior week’s strong rally.

Open interest surged 39,343 lots in nine sessions to 214,378 through Monday, and then fell 17,189 lots the next two days. Prices gave back all the gains from Aug. 6 plus some in just three sessions.

October lost 769 points to close at 83.95 cents and March fell 533 points to 83.63 cents. The December-March inversion, which traded as wide as 324 points on Aug. 16, narrowed to as tight as 49 points.

Cash grower-to-business sales, including new-crop cotton from South Texas, totaled 1,986 bales on The Seam on prices averaging 81.77 cents and premiums of 28.13 cents over loan repayment rates. Prices ranged from 87.96 cents to 76.53 cents. The basis on the base quality gained 94 points on Texas cotton to 395 points off October.

Meanwhile, U.S. crop conditions improved during the week ended Aug. 18, with good to excellent up three percentage points to 46 percent and poor to very poor down two points to 23 percent, USDA reported.

The DTN cotton condition index rose to 98 from the season’s low of 75 a week earlier and from 80 a year ago.

Ratings in Texas showed good to excellent up four points to 35 percent and poor to very poor down two points to 34 percent. Improvement had been expected as a result of recent rainfall in the West Texas Plains.

But Georgia’s crop also showed improvement — unexpected in some quarters — as good to excellent rose two points to 50 percent and poor to very poor fell two points to 14 percent.

Cotton setting bolls nationally advanced 12 points to 85 percent, seven points behind a year ago and four points behind average. A week earlier, boll-setting lagged by 14 and eight points, respectively.

Boll opening was 8 percent, behind 16 percent last year and 14 percent for the five-year average.

The crop in the West Texas Plains was about 10 days behind schedule but advanced with timely rainfall and warm weather. Producers began to taper irrigation except on drip-watered fields, where irrigation will continue into September.

On the demand scene, net U.S. all-cotton export sales topped weak expectations but still were rather mundane at 91,800 running bales during the week ended Aug. 15, up from only 56,500 bales the week before. Shipments again exceeded the pace needed to reach the USDA estimate, though slipping to 251,700 bales from 291,500 bales.

China, the leading destination for U.S. cotton exports at 42 percent in 2012-13 and 54 percent in 2011-12, thus far this young season has booked 14 percent of commitments totaling 3.494 million running bales, behind 24 percent by Mexico and 17 percent by Turkey.

Consumption in China — the world’s leading cotton consumer — is projected by USDA unchanged from 2012-13 at 36 million bales but well below the 50 million used in 2009-10. Imports are forecast at 11 million bales, down from 20.3 million in 2012-13 and the lowest in four years.

China’s cotton spinners have lost market share over the last several years as a result of a government-established price floor that has maintained domestic prices above world prices.

Replacing some domestic spinning, China has imported significant amounts of cotton yarn the past several seasons, including an estimated equivalent of 8 million bales in 2012-13, twice that of 2010-11.

Beneficiaries of China’s yarn imports include India and Pakistan, where cotton mill use has risen steadily the past several seasons.

Mill use is forecast at a record 23.3 million bales in India, 750,000 bales above 2012-13, and 11.7 million bales in Pakistan, a 6 percent gain and close to its record high of 12 million in the mid-2000s.

The first 2013-14 crop estimate by the Cotton Association of India pegged the output at a record 29.07 million 480-pound bales, up from USDA’s August projection of 28 million.

This may have contributed to a limit-down close on Tuesday, though the possibility of larger Indian production has been talked in trade circles for some time because of the favorable monsoon.

The cotton area isn’t expected to exceed that of 2012-13, the association said, attributing the larger crop to higher yields. The CAI also estimated the 2012-13 output at 27.8 million bales, against USDA’s 26.5 million.

Back on the market, trend-following funds bought a net bulging 16,200 lots in futures-options combined during the week ended Aug. 13 to boost their net longs 27 percent to 76,039 lots, according to the Commodity Futures Trading Commission.

Index funds bought 3,023 lots to raise their net longs to 75,963 lots and traders with non-reportable positions bought a net 3,614 lots to hike theirs to 12,173 lots.

Commercials sold a net 22,838 lots, adding 30,970 shorts along with 8,132 longs to expand their net short position to 164,175 lots. In futures only, non-commercials increased their net longs by 0.9 of a percentage point to 39.7 percent of the open interest.