Cleveland on Cotton: Demand is on Life Support; Planting Intentions Look Too High
The New York March contract bounced off last week’s 58 cents and settled the week one tick above 60 cents even. Thus, for now the deep bearishness has been avoided, but a 60 cent close keeps the technical signals weak.
Too, save for export sales around the globe there is little, if any bullishness. Demand remains all but nil and polyester prices continue to beg for lower cotton prices.
How bad is demand? Consider Macy’s offered a $9 men’s dress shirt sale. Buy three and shipping was free. Maybe it was real, but I was not smart enough to navigate their website to complete an order. Nevertheless, demand is on life support as is hope of upward price movement.
Global export sales continue to be impressive with Brazilian, Indian, Australian and U.S. sales booming. Yet, given New York in the low 50’s to just 60 cents, basis SLM 1-1/16 inch, sales should be strong. Yet, from a price prospective, the announcement of very strong export sales did not move the market. In fact, it was those massive sales, over 300,000 RB that helped keep the nearby March contract from slipping lower.
The real support in the market came from China’s “almost” announcement that it would defer state sales until the July August period. The unseen eye in the news leakage was the comment that the state would allow sales to occur at the “market price.” Heretofore the Chinese have used that phrase to mean the world market price.
Understanding that prior Chinese sales and purchases have been some 20 to 70 cents above the world price (resulting in very few sales to domestic mills, but large purchases from Chinese growers) the announcement reinforces an early announcement that the government would no longer support prices; thus, allowing the market to trade well below the Chinese support price. This was also consistent with the strong price retrenchment of Chinese futures prices that has been ongoing since November. In fact, Chinese futures prices have established record lows.
The Chinese government has near a $1 (one U.S.dollar) per pound subsidy in the reserve stocks and on several occasions, including this one, announced its intentions to allow cotton to move in the market at the world price, taking the loss rather than continue to support the domestic market. Further, it should be noted that much of the reserve is approaching 4 to 5 years in age and a beginning to suffer notable quality deterioration. Nevertheless, as discussed in prior reports if it is cheap enough it will sell.
The market impact of the announcement was to offer marginal support the front end of the market. That is, the market realized that the cotton would not be dumped immediately. Nevertheless, the back end of the market continued to ease lower with the knowledge that the cotton will be coming to market in the July August period—before the Northern Hemisphere harvest begins and some 4 to 5 months before the peak of the Northern Hemisphere harvest. This pushed the December 2016 contract back below 60 cents, albeit just below. In reality, the back months will track closely with the front months well into the planting season as stocks outside China remain tight and a weather anomaly could push prices higher if non-Chinese stocks are perceived lower.
The aforementioned U.S. weekly net export sales totaled 308,800 RB of Upland, a marketing year high, and 10,100 RB of Pima. Additionally, 12,100 RB were sold for delivery in the 2016-17 marketing year. The primary buyers were Vietnam, Turkey, South Korea and Indonesia. Exports of 163,800 RB of Upland and 26,400 RB of Pima were well above the weekly level to reach the USDA estimate of 9.5 million bales. In fact, should this prove to be the weekly average, total exports will climb to the near 10.4 million bales, 900,000 more than the current USDA forecast. Pima shipments represented a marketing year high. Thus, as suggested last week, USDA has a battle with respect to its export forecast. Demand for cotton goods is suffering, but the low cotton price is boosting U.S export sales at a time when USDA is lowering its forecast. The logic is sound, yet, I expect to see exports climb back to the USDA January forecast of 10 million bales—or even higher. That also implies U.S. prices will remain in the mid to high 50’s, low 60’s.
The industry planting intentions survey of 9.1 million planted acres still looks high to me. Let’s hope prices can rebound and bring more acres into production, a sore need for the U.S. cotton industry. Cotton growers are inherently bullish, praise to them and may they be rewarded for their risk and toil. Too, Texas growers have to increase plantings—no other alternative. Yet, for now and until one of us can break this crystal ball, 60 cents and lower is frozen in the glass.
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I recently attended a Farm Credit Director Development program in Charleston, South Carolina, where Dave Kohl presented an agricultural economic update. I thought his presentation was exceptional. He described agricultural