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Cotton prices, basis the New York ICE December contract, traded slightly lower during the week, as the market was slightly below 84 cents in afternoon trading near its weekly close.

Prices were under pressure all week due to a combination of slower buying from Chinese mills, a perceived improvement in both the Indian and U.S. crops, and currency weakness in India which led to higher prices to Indian mills for local cotton (despite lower prices as quoted in dollars, i.e., exported cotton). However, these factors must also be weighed against declining prospects in China and Pakistan.

Prices are working the very narrow 82-to-84 cent range within the more well-defined 81-to-88 cent range. While the concern of trading as low as 78 cents is being expressed by more analysts, I continue to feel the 80-81 cent floor will hold.

In the U.S., the Texas crop continues to struggle with its very limited water availability and no change in sight. The Mid-South and Southeast crops have finally experienced some seasonal dryness, but crop development in both regions remains solidly behind. Continued dry weather is necessary through September and into October for both regions to reach their production potential.

Cotton trading was light all week as speculators reduced their long positions. The specs see a blanket of neutral-to-bearish technical indicators and will likely continue to exit the market. Assuming they do so in an orderly manner will prevent the market from panicking to lower prices. 

Slightly bullish news emerged from China this week as the Cotton Association lowered its estimate of the Chinese crop to 31.2 million bales. The current USDA estimate is 33 million.

Too, Indian mills suggested this week that their coverage for cotton is very limited and that most mills needed cotton for immediate delivery. Their concern is that the government estimate of stocks is highly inflated. USDA carries an even higher level of stocks and – as we have written for some time – the cotton trade and Indian government believes the USDA estimate is vastly inflated, possibly by as much as three million bales. Fearing this, a number of Indian mills began sourcing cotton and fixing its price into the second quarter of 2014.

Upland U.S. export sales totaled a net of 68,800 bales versus total sales of 120,100 bales. The difference, being cancellations, were believed to be based on mill-merchant agreements to accept the cancellation and split the futures market gain. These type agreements have become fairly typical over the past two years.

The December contract may be facing its toughest battle to date in defending the 81-82 cent support level. However, its success this week should speak loud, as the market faced an array of very uncertain problems and maintained its stamina in climbing back to near 84 cents going into the close.