Thompson on Cotton: Strong Exports This Month, but Unlikely to Last
As if it’s stuck in a holding pattern, cotton’s December contract has been trading in a very tight two cent range between 73.50 and 75.50. The squeeze between the short trade and long spec community continues to be the major influencing factor on the front months while affecting December to a similar but lesser degree.
Despite some volatility, the new crop contract eked out a 35 point gain last week and is up a mere 6 points in early action this week finding itself at 75.35 on yesterday’s (3/15/17) close. This coming on the heels of two highly awaited USDA reports released recently, one of which was fairly neutral while the other was suggestively optimistic.
No real surprises were seen in the USDA’s March Supply/Demand report. The biggest adjustment was a 500,000 bale increase in the U.S. export estimate. Though certainly expected, it was larger than most anticipated; especially given they had previously raised it two months in a row. The resulting reduction in U.S. ending stocks to 4.5 million bales was mostly offset by a comparable increase in world ending stocks; thus, the report delivered nothing the market hadn’t already taken into account.
On a more positive note, last week’s export sales report showed combined old crop and new crop sales topping 500,000 bales for the third consecutive week. In addition, weekly shipments exceeded 500,000 bales, a marketing year high. This week’s report followed suit. Released this morning, it showed combined sales of 458,700 bales and shipments totaling almost 338,000 bales.
Though it’s impossible to keep up this torrid pace, selling almost two million bales in a month at these elevated prices reflects a strong demand for U.S. cotton. Due to its excellent fiber quality, mill buyers see our cotton as a bargain at these prices.
Simply looking at demand alone, one could see the above as fodder for 80 cent cotton. The key becomes sustainability, especially when considering the 2017 crop could be even larger. Don’t lose sight of the fact this increase in demand is not a result of cotton gaining market share over man-made fibers, but rather U.S. cotton expanding its share of the global trade at the expense of previous export competitors such as India, Pakistan and Uzbekistan. Therefore, these current conditions are subject to change.
Last week saw China reinstitute the auction of their cotton reserves. Early indications show things are picking up where they left off last year. Offerings sold out each day and the market reacted calmly. As a note, of these offerings 50 percent were 2012 cotton, 20 percent were from 2011, while the remainder came from the 2013 crop.
One can only imagine the fiber quality associated with cotton of this age. To be usable this cotton will certainly require the blending of new crop cotton. For this reason, it is a good bet China will likely import more cotton than is now projected. Not only is reducing these massive reserves, which have been hanging like an anvil over the market bullish long term, but short term as well it should provide an expanded market for U.S. exports.
These improvements in the world supply/demand balance sheet are quite encouraging, and if prolonged, bode well for the future of cotton. However, we can’t overlook the influence the spec community currently has on this market’s near term price direction.
Beginning last August they have amassed a long position of historic proportions, the equivalent of over 20 million bales. Their current “all in” strategy is more responsible for where prices are today than anything else, but leaves them little in the way of excess cash to propel prices further.
At some point, profit taking will occur for they are not doing this for the love of cotton. Granted, the improving fundamentals that led them to buy in, may entice them to stay a while longer in hopes of reaping even greater profits. On the other hand, the trade is betting their exit will come sooner than later.
In any event this showdown amongst the two will be settled by the end of June at the latest, as the July contract nears expiration. As my wise and wily colleague, Stuart Frazer, is quick to remind me, they move with a herd mentality. When one heads for the gate the rest are fast to follow making it near impossible to close.
What we do know is when the smoke clears, the market will be guided by fundamentals. That considered, without the further strengthening of demand, 75 cent cotton could look real good come this fall.
Our recommendations remain unchanged in that a grower should use this as an opportunity to price a third to half of their expected production either through a pool, forward contract, or the use of options. Choice Cotton is still offering a forward contract with a positive basis and quality premiums for anyone wishing to book some of your 2017 crop. Call our office at 334-365-3369 to discuss these contract details.
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