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O.A. Cleveland's Update

October 10, 2013
By Dr. O. A. Cleveland

The cotton market eased through another positive week as both the
fundamentals and technicals factors mentioned last week remained active
trading news. Prices, basis the New York December contract, spent most of
their time between 86 and 87.50 cents, closing just above the 87.50
market. The trading at 81-to-88 cents continues, with no strong movement
expected outside the range.

The mid-80s is sound, with a bias to the topside.

Quality will be a rare lot this year. Just as the Southeast is facing a
tropical storm, China has a typhoon headed for its traditional cotton
belt. Ongoing weather problems in Asia and the Subcontinent have damaged
both yield and quality, with particular emphasis on India, China, and
Pakistan in that order.

Those fundamentals, coupled with a sneaky push from funds, lifted prices
all week (maybe I should not say "sneaky," as all trading appeared to be
well above board). More correctly, the funds have quietly and without any
fanfare added to their long positions all week. They continue to see
potential above 90 cents. Maybe that happens, but I see far too much
demand degradation once prices reach the 88-to-90 cent level.

Higher prices did limit demand this week. Yet, market action appeared to
open a new "High Price" chapter and put in two meaningful sub-titles. The
December 2014 contract (Red Dec/Pink Dec) finally moved back above 80
cents and eased its way to nearly 81.50 cents. World prices also climbed
back to near 93 cents. And, we¹re nearing the peak harvest season -- i.e.,
the yearly seasonal price low -- in eight of every ten years.

An even more bullish tone, at least for the remainder of the 2013 crop
and into early 2014, is that mills have increased the price point where
they re-enter the market for export purchases to about 85 cents. This is
an indication that mills have concerns regarding both quality and
quantity.

Three months ago mills became active at 83 cents and were more and more
aggressive with each 20 point drop. The past week saw aggressive buying
begin at 85 cents. That does not mean that an 85-cent floor is in the
market. But it does mean that any challenge of the 81-to-83 cent price
floor is likely exhausted, and the 84-to-85 cent mark is fast becoming
the price floor.

Additionally, price support is also based on the Chinese decision to
continue purchasing all grower cotton that meets quality specifications,
(paying roughly about 161 cents per pound). This adds nothing but more
fuel to the fire in the search for quality cotton in all textile markets.

The backdrop in all of this remains the collapse of the Indian rupee in
the world financial markets. In dollar terms, cotton price for Indian
mills is now as much as 98-to-103 cents per pound. The Indian weather
concerns also have raised concern that Indian mills may not have enough
cotton to keep operating at full capacity for as long as sixty days. And
this is the world¹s second-largest producing and consuming country!

Cleveland is a Professor Emeritus, Department of Agricultural Economics,
Mississippi State University.

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