Cleveland on Cotton: Volatility is Extreme – 3 Factors in Play

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The cotton market continues to exhibit extreme volatility as textile mills and speculative funds attempt to fix prices in front of the expiry of the December contract. 

Going into the weekly close the spot December contract traded a range well above 300 points. The same fireworks are predicted for the coming two weeks. World production was estimated slightly higher by USDA in its November world cotton supply demand report released on November 9, up 600,000 bales to 103.3 million. World consumption was essentially unchanged at 112 million bales.

Thus, world carryover was estimated at 88.3 million bales, up 600,000 from the October report. However, this still reflects a year on year decline in world carryover of 8.6 million bales, a clear indication that world stocks are declining for the second consecutive year. As estimated changes were well within expectations the market discounted the report and remained range bound within a narrow three cent, 68-71 cent trading range, basis the nearby New York ICE December contract. The wider five cent 67.50-72.50 cent trading range remains the most influential trading area, but the tighter three cent range contains nearly all the trading activity. The wider range will prevail another week, but pressure is building to move prices lower.

First notice day (FND) on the December is November 23 at which time the March 2017 contract will become the lead (spot) month. Additionally, it will also mark the beginning of the delivery period for longs that wish to deliver cotton against the contract. As December trading winds down, the market will be keen to look for any potential price squeeze which to date has not surfaced. The absence of such a price squeeze will potentially allow prices to ease lower, likely down to the 63-65 cent range.

The AgMarket Network group suggested in their monthly conference call that the lower end of the price range would drop to 63-65 cents with most observers favoring 65 cents as the new potential low. Further, while the projected high had been in the 72-75 range, the new high through the end of the 2016 calendar year, was lowered to the 72-73 cent range. However, it was noted that excellent export offtake has occurred on price drops below 68 cents.

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The 67.50 cent level has proven to provide excellent support on any attempt to push prices lower. However, mills have not been as aggressive the past three weeks as they had been. If that attitude continues then prices could slip lower. Too, it is expected that the world crop estimate will continue to rise.

Both the U.S. and the Indian crops were increased in the USDA November forecast and those crops will likely be another 200,000-300,000 bales higher in the coming months. The Pakistani crop will also likely be increased. The November USDA estimate for the Indian crop was 27 million bales, up 500,000 on the month while the U.S. crop was increased 130,000 bales over the October estimate and now stands at 16.2 million.

U.S. export sales for the most recent week were 181,800 RB including Upland and Pima. The primary buyers were Indonesia, Thailand, South Korea and China. Weekly shipments were 151,100 RB. Export sales remain on pace to exceed the USDA estimate by 300,000 bales or more. Shipments continue to lag expectations; however, the new norm suggests that shipments will be more evenly spaced during the year. Thus, there should be no need for alarm at present.

Growers were given another opportunity to price their crop above 70 cents this week. Let’s hope that presents itself again at even higher prices. Nevertheless, I remain firmly of the opinion that growers should be fully priced at 70 cents and above.

Three major factors are in play:

  1. First, world stocks are increasing and the long term implication suggests lower prices. Additionally, world fiber quality, especially across the U.S., has been exceptional this season.
  2. The very tight supply of high quality stocks has been resolved and mills will have numerous options and growths from which to select during the coming year.
  3. Finally, and most important than all, mills continue to turn away from cotton in record numbers and in record volume. The cotton industry has been totally ineffective in combating the almost weekly shift from cotton to acid based chemical fibers. Whether it be in finished products or in grey goods or apparel imported by the U.S. and Europe the retail establishments are simply making it difficult for the consumer to find cotton goods. Retail establishments and importers are simply turning away from cotton in an attempt to increase their profit margins.

It is very clear that the world export market for cotton all but disappears every time cotton prices move slightly above 70 cents, basis the New York ICE nearby contract. At, present, that is the general price level that mills appear to switch from cotton to petroleum acid based fibers. The cotton industry has been totally unsuccessful in meeting this challenge.
Price volatility will dominate the near term cotton trading.

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