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Cleveland on Cotton: Demand Grows as Price Becomes More Competitive

Debra Ferguson
By O.A. Cleveland, Consulting Economist, Cotton Experts November 10, 2017

Cleveland on Cotton: Demand Grows as Price Becomes More Competitive

©Debra L Ferguson Stock Images

USDA gave us a mildly bullish supply demand report on Thursday and after a typical market fake out, prices reversed and moved higher, ending the week back above 69 cents. The report was expected in that world consumption was increased and world carryover was lowered. Conversation leading up to the report was notably nervous as many talked in terms of making a possible new low. Yet, while the U.S. crop was judged higher, as was U.S. carryover, the more important decline in world stocks led the market higher. Thus, as expected, the long held 5 cent trading range 65-70 (+/-) cents will continue, most likely into the December supply demand report on December 12, 2017.  Further, there is presently little reason to expect the very tight 67-70 cent range to be broken, other than such a narrow range is typically short lived. Some still feel that a trip to the very low 60’s is imminent, as growers could become more aggressive sellers as the end of the year and first of the New Year farmer selling looms. Certainly that is at least 300 points below my thoughts.  

In its report USDA raised its estimate of the U.S crop 300,000 bales, up to 21.4 million. The crop size was increased based on USDA increasing the average U.S. yield to 900 pounds per acre. All states in the Southeast averaged at least 900 pounds per acre and all states in the Midsouth averaged above 1000 pounds per acre.

U.S. carryover was increased 300,000 bales, up to 6.1 million. Certainly a few more hands must be played, but the odds favor a somewhat smaller final crop size and bigger export number. Thus, a carryover closer to 5.5-5.6 million bales is likely on the horizon.

U.S. cotton is the most competitive in the world. With futures between 67 and 72 cents mills will continue to flock to the U.S. for cotton. U.S. cooperatives and merchants have aggressively offering strong basis bids to potential mills and that has encouraged excellent sales. It is a far more economical trade for mills versus other cottons. Mills can take advantage of the basis offers, buy On-Call and fix prices at later date. Granted, mills have not been very astute at fixing the price the past two years, but possibly they will begin to finally pay attention this season. In that regard mill on-call sales have increased almost every week during the 2017-18 marketing year, an excellent indication of improving demand. Staying on the subject of demand, as stated last week, demand moves markets and cotton demand has resurfaced.   

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USDA raised its estimate of world cotton demand 1.3 million bales over last month’s estimate, and it is now up to 119.3 million bales, more than 5.0 million bales more than last year. Being redundant, demand moves markets and the demand for cotton will continue to grow. Driven by consumer preferences, and the rapid increase in polyester prices due to massive worldwide pollution issues that are still seemingly denied by the casual wear brands like Nike and Adidas, as well as some of the big box retail groups, cotton has become much more price competitive versus polyester and other plastic fibers. The Washington Post highlighted some of Nike’s problems this week. USDA lowered world carryover some 1.5 million bales in the November report, down to 90.9 million bales.  It is likely that world carryover will fall as much as another 2.0 million bales by the end of the current marketing year, possibly falling below 89 million bales.

That scenario proposes that cotton growers across the U.S., in 2018, will hold on to most of their 2017 plantings as the report included very bearish reports for soybeans, corn and wheat. Presently cotton appears to be the better alternative in 2018 for the Midsouth and the Southeast regions. Cotton will again be the only alternative for Texas and Oklahoma.

A slightly bullish scenario now exists for cotton, but any movement above 71 cents will be difficult.

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Debra Ferguson
By O.A. Cleveland, Consulting Economist, Cotton Experts November 10, 2017