Cleveland On Cotton: No Letup On Demand – Even U.S. Mills Buying

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Exceptionally strong demand continues to underpin the bull’s hopes for higher prices, while the bears are supported by the idea that market trading has become dull and listless in its attempts to break out above the highs established two weeks ago. 

The market’s misunderstanding of tariffs and the resulting Wall Street attitude has also kept the market skittish.  The 82 cent plus level has provided excellent price support for both the May and July futures contracts as mills continue build very bullish on call sales positions.

Yet…

The market wants to see the old crop May and July contracts move above 86 cents.  Textile mills are playing a slightly bearish game, wishing and hoping prices will move back into the upper 70’s.  It could happen, but it will not.  Never say never.  World trade is just too strong.  The 82 cent price support should hold with a bias for higher prices.  The new crop December contract, is also supported by very active demand.

The market is struggling to move above the 78.50 cent level, but has defended the low 78 cent level very well.  That contract remains bullish based on demand and weather concerns.  Demand for the crop will remain exceptional, but Mother Nature can still wipe out much of the bullishness with very kind moisture between now and mid-June in West Texas as the drought is beginning to extend into the Rolling Plains. Oklahoma, Kansas and the Texas Panhandle are little more than hardpans now.

Nervous about the world trade environment and talk of tariffs, the market will continue to muddle through its trading days until traders come to grips with the fact that world stocks are declining.  The U.S. department of Agriculture has a stake in this as it refuses to update its Indian cotton statistics.  It is almost as if USDA wants the cotton market to move lower.

India’s Data Base Void Of Any Reality

Virtually every international public and private cotton group or organization, including India, has advised USDA that its Indian data base is void of any reality and is based on multiple assumptions void of factual date.  Were USDA to grasp this and correct its errors surrounding the largest producing country in the world, the market would likely be free to stretch its wings. 

Cotton Commentary


But in the absence of such, and on top of the nervousness surrounding the tariff issue, the U.S. cotton grower is taking cards from a stacked deck.  Another indication of the tightness in world stocks was displayed this week in the export market as Brazil, a major U.S. export competitor purchased over 40,000 bales of U.S. cotton for nearby delivery.  Brazil is out of cotton for export.  Thus, any bales it sales to meet export contracts must be replaced bale-for-bale by imported cotton.

Practically speaking, this means it must be replaced by U.S. cotton.  Thus, until some resolution can be found within USDA, the market will remain highly volatile and nervous.  It will continue daily trying to correct USDA foreign agricultural statistics data so as to get a handle on prices.

Weekly net export sales totaled 328,800 RB of Upland and Pima   Another 199,200 RB were sold for 2018-19 delivery.  Both the 2019 and 2020 December futures contracts have climbed to 73 cents or above.  These prices, while not there yet, are beginning to approach the breakeven point where a grower could afford to purchase a new cotton picker…a $700,000 plus investment.

We Need Another Nickel

The market seldom sees a three-year price stream so favorable.  We need another nickel.  Too, if USDA did not insist on carrying more cotton in India than the country even has for storage capacity, and were India not importing cotton for its own mills…who knows?

Export sales were made to 24 countries and shipments totaled 414,000 RB of Upland and 25,500 RB of Pima.  Vietnam, China, Pakistan, Indonesia, and Turkey were the primary destinations.  Another four countries received shipments 15,400 RB or more indicating the literally immediate worldwide demand for U.S. cotton.  Still cotton approved and ready for shipment continues to stack up for want of available transportation.

We have preached the single word demand, demand, demand.

Demand markets mean higher prices.  Cotton demand is still increasing. Even U.S. mills are using more cotton than in 2017.  Foreign mills are now spinning around the clock and buying on a daily basis.  The Chinese auction is off to a very solid beginning.

The government offers at auction 30,000 metric tons for sale every day, 2011-2012 crop cotton (137,500 bales).  The daily purchase by mills is 100,000 bales or more.  Thus, Chinese demand remains very strong.  In round numbers, the U.S. sold for export over 500,000 bales on the week and shipped some 450,000 bales.  In just a very few weeks the world demand for U.S. cotton has exceeded 3 million bales.  The weekly report can be viewed at: apps.fas.usda.gov/export-sales/cottfax.htm

Additional bullish support continues to come from the on call sales report.  While mills are struggling with price fixations, some pricing is being done.  However, on call sales for May and July futures contracts continue to increase, not decrease.  Thus, upward price pressure is building and will likely push July prices higher relative to May. The difference between 2017 and 2018 is increased demand.  Additionally, mills initially felt that world stocks would build.  However, it has been clear since late November that world stocks would decline for the third consecutive year.

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Follow O.A. Cleveland on Twitter at: @OAcotton

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