Cleveland on Cotton: Tariff Impact; Non-U.S. Cotton Products Still Coming

©Debra L Ferguson Stock Photography

B B King again sounds out, The Thrill is Gone, the November supply demand report shoveled out enough new information to send the market limit up. Yet, two days after the report the market floundered and slid into the low 78 cent area, much like the response to a bearish report. 

Such is the impact of the cotton tariff battle with China. Raw cotton, that is “bales of cotton,” continue to get hammered via price while Chinese cotton textile goods, manufactured from non- U.S. cotton, gush into the U.S. untaxed, unaffected by the U.S. tariff. This is the primary reason why the big market bear sits astride the cotton market.

I was a big supporter of the tariff. Yet, as long as the U.S. Trade office allows non-U.S. cotton to totally substitute for U.S. growths, ICE futures prices and the price paid to farmers will remain under pressure. China will remain free to continue to inundate the U.S. market with foreign produced cotton goods.

Thus, the trading range, 75.50-80.50 cents remains in place. The range is locked in place until some new fundamental is uncovered. Of course, any news of a resolution in tariff issues will boost prices while a continuation of the tariff will keep the market range bound.

A continued decline in the Indian crop should point prices slightly higher. While the Indian crop was lowered 1.0 million bales this month, many think another one million bale decline is necessary.

USDA’s November supply demand report reduced the hurricane damaged U.S. crop 1.35 million bales with principal reductions in Georgia and Alabama. The U.S. was estimated at 18.41 million bales, down from 19.76 in October.

U.S. Cotton Exports

U.S. exports were lowered from 15.5 million bales, down to 15.0 million, a half million bale reduction. Domestic consumption in the U.S. was lowered 100,000 bales, down to 3.3 million.  Domestic carryover was lowered 700,000 bales, down from 5.0 million to 4.3 million.

This significantly lower carryover level will help support prices in the current trading range and will ensure an increased planted acreage of cotton in the U.S. for the 2019 crop year. Nevertheless, the U.S. will continue to be somewhat hamstrung to meet its export forecast as merchants will be hard pressed to meet the quality standards mills are expecting to receive. Too, the continued wet harvesting season will likely reduce the final U.S. crop, possibly another 100,000 to 150,000 bales lower.

Tighter World Production

The world supply demand scenario tightened even further as world production was lowered some 2 million bales, based primarily on reductions in the U.S. and India. Production was forecast at 119.4 million bales compared to 121.7 last month. 

Yet, world consumption was lowered one million bales, down from 127.8 million bales, down to 126.9 million. The principal change was the nearly two million bale drop in world carryover, down from 74.5 million to 72.6 million. Just a year ago the primary discussion centered on a then carryover of 80 million bales plus carryover.  Thus, the nearly ten year glut of world carryover, mostly in China, is over.

Bullish – Bearish

The long and strong held adage that a bullish report that is met by a bearish price response spells doom and gloom for a market. That cannot be overlooked. Yet, in the face of a rapidly declining carryover both in the U.S. and around the world, coupled with the market interfering impacts of the tariff, I now conclude that the market’s easiest path is a climb slightly above 80 cents.

That being said, a December 2018 futures price at 80 cents and/or a December 2019 futures price above 80 cents both plead with you to begin or add to your price fixing. If one has not fixed any 2018 crop, then it is time to price at least 50 percent of expected production. Ditto 2019 crop!

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