Cotton Bull Market Beginning To Soften?
Today’s Spotlight Market
Even though China is the world?s largest consumer and producer of Cotton, the world?s most populous nation is expected to trim its Cotton-planted acreage this year. The China Cotton Association expected Chinese Cotton acreage to fall to 4.2 million hectares, as domestic demand is expected to slow. In addition, the Chinese Government is believed to control over 50% of the global Cotton stockpile, which could prove problematic for U.S. Cotton sales should China release the surplus on to the domestic market.? ?
Fundamentals
The strength in the Cotton futures market has surprised may traders as export demand remains strong. The USDA raised its estimate for U.S. Cotton exports earlier this week by 1.9% to 10.7 million bales. If true, this will leave U.S. Cotton carryover at a tight 2.8 million bales. Last week?s cotton exports totaled 60,000 bales, while lower than the 4-week average, is still large enough to raise concerns that supplies will become extremely tight prior to this season?s harvest.
While old-crop Cotton prices continue their bull market stampede, the price reaction for new-crop months is more muted. The December 2014 contract is hovering near the 80 cent price level vs. nearly 93 cents for the old-crop May 2014 contract as it appears that U.S. producers will increase their Cotton planted acreage this season. The National Cotton Council?s annual survey stated that producers expect to plant just over 11 million acres of upland cotton, up over 8% from last year.
The majority of the additional acreage is expected to be planted in the Mid-South and Southwest regions of the U.S. where Cotton acreage is expected to increase by 12.5% and 12% respectively. Although increased acreage should set a bearish tone for new-crop Cotton futures, we should remember that the all-important Southwest region has suffered through a multi-year drought and actual production totals will be highly dependent on the weather.
Technical Notes? -? View Today’s Chart
Looking at the daily chart for May Cotton, we notice the 3-month long Cotton rally may be showing the beginning of a topping phase as Thursday?s move to over one year?s high was met with selling pressure causing prices to close lower on the day. Trading volume has also been light the past several sessions which may be a sign that recent buying was short-covering in nature.?
The chart ?gap? created on March 5th remains open but could be a potential price target on a well-overdue price correction.? There appears to be a ?bearish divergence: forming in the 14-day RSI after readings retreated from overbought levels. Thursday?s high of 93.75 looks to be the next area of resistance for the May futures, with support found at the beginning of the chart ?gap at 89.57.?
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