After a five month rally, cotton futures seem to be searching for fresh, friendly, fundamental news. Prices slipped earlier this week, posting an outside bearish reversal on daily charts.
Seeing this technical signal makes me wonder if investors may be headed to the sidelines due to uncertain news that President Trump was considering blocking imports of cotton and cotton products from China’s western region of Xinjiang over accusations of forced labor.
While nothing has been formally announced, it was enough news of ambiguous nature to begin a round of profit taking of long positions.
Will the trend hold?
As of this writing, the five month up trend continues to hold quite well on daily futures charts. However, a close below 63.00 cents per pound for December cotton futures would break the uptrend, and likely allow for technical selling to occur.
Friday’s USDA report will provide the next piece of the fundamental puzzle. An unexpected friendly report could keep the five-month up trend intact. However, negative fundamental news could be enough to trigger technical and fund selling, which could send prices lower quickly.
Looking ahead to Friday’s USDA report
Looking at pre-report estimates for the upcoming USDA report, trade is looking for slightly smaller U.S. cotton production totals. In August, the USDA pegged U.S. cotton production at 18.08 million bales. The average trade estimate heading into Friday’s report is 17.57 million bales, with a range of estimates of 16.75 to 18 million bales. Ending stocks are also expected to be lower. In August, the USDA estimated U.S. ending stocks at 7.6 million bales, with trade expecting Friday’s report to show ending stocks to be closer to 7 million bales. Be aware, even that expected drop in ending stocks would leave the U.S. with ample supplies; the second largest in over a decade.
Global supplies are also large. The top five major cotton producing nations (in order) are India, United States, China, Brazil and Pakistan. In August USDA pegged global production at 117.53 million bales, with pre-report estimates for Friday now only slightly smaller at 117.07. When looking at global ending stocks, they are currently at a record large amount. Fridays’ USDA report is not expected to change that notion with ending stocks expected to be near 104.44 million, only down a bit from 104.94 million in August.
Friday’s report will be scrutinized with traders also looking at the potential rain coming into the nation’s cotton growing regions. Over one third of the nation’s cotton crop has open bolls, which could be adversely affected by too much rain. Keep an eye on the USDA report, weather, and the charts for short term price direction.