Thompson On Cotton: Don’t Wait For 80 Cents

Photo: University of Tennessee

Although many of you may have grown tired of all the hubbub surrounding the Mueller Report and subsequent questioning of Attorney General Barr, I instead came to appreciate it for the fact it kept our President’s tweets preoccupied.

That was until this past weekend, of course. Growing impatient with the lack of progress in our trade negotiations with China, President Trump issued a scathing tweet stating that if significant progress wasn’t made,  additional tariffs would be placed on Chinese goods beginning this Friday.

As you would expect this ultimatum sent shock waves through the world’s financial and commodities markets on Monday. Cotton took it on the chin, with July futures losing 222 points to settle at 73.51, while new crop December futures gave up 164 points to finish the session at 72.91, the lowest close since the week of February 12.

Such mounting tension is alarming, for most have considered the trade talks our ace in the hole. Once resolved, it would be the event needed to push prices closer to 80 cents, possibly beyond.

To imagine either side getting up and leaving the table at this late stage is unthinkable. Maybe the President was trying to stir some life into the debate. But when considering the prideful nature of the Chinese culture, that becomes a dangerous ploy, all the while putting ag commodities and the American farmer in great jeopardy.

Nonetheless, a rebound in prices is very possible once the dust settles. Just last week, trade representatives from both sides seemed confident they were closer than ever to an agreement. However, the setback has proven costly time wise when you consider it took nine weeks for prices to slowly crawl their way from 72 cents took a recent high of 77 cents, but took only three short weeks to give it all back.

Even considering a resolution after the initial favorable knee jerk reaction, prices will settle into another slow crawl that will require a new round of positive news to push it forward.

Crop Size – Part Of The Bigger Picture

No doubt there will be obstacles along the way, foremost is the potential for a much larger U.S. crop. As with a trophy fish, every time someone mentions its size it gets bigger and bigger. Just this week, one market analyst touted a 25 million bale domestic crop. Not out of the question as planting progress matches its 5-year average with 19% of the crop now in the ground, all the while accompanied by excellent soil moisture conditions belt wide.

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Last week’s export sales report was viewed by many as lackluster. Though old and new crop sales were a combined 201,000 bales this was significantly below the four-year average.

Most discouraging were shipments, which fell below 300,000 bales, well off the pace needed to meet the current USDA export estimate.

Here Are The Positives

Those who know me or have read my commentaries over the years understand I’m an eternal optimist, always looking for the positive. Though difficult at times, today one must look at the growing world economies as very favorable to demand.

The U.S. is coming off a first quarter where GDP topped 3%, when at the beginning of the year it wasn’t expected to exceed 1%. In addition, unemployment is at its lowest level in decades, falling below 4%.

Furthermore, the Chinese economy, with a growing middle class, is estimated to expand at a pace greater than 6%. All this leads to increased consumer confidence and purchasing power. With the incomprehensible number of people in China alone, just imagine how much cotton would be consumed if they all decided to buy one more tee shirt.

Agreement – Sooner Rather Than Later?

Referring once again to the trade negotiations with China, I for one believe an agreement will be made sooner than later. This nearly yearlong debate has come too far and means too much to both parties, especially China, to back away now. If we ease up on the tweets and let cooler heads prevail progress can be made, which will pay dividends down the road.

We at Choice Cotton are charged with helping you navigate the cotton market – as volatile as it might be. Our current recommendation is to remain calm, let the dust settle, and not react irrationally.

Hopefully, you have already booked a portion of your crop in the mid 70s or better. If so, seriously consider adding to this position when the market returns to this level.

For those who have not priced any new crop but were waiting on 80 cents, abandon this notion. We strongly encourage fixing a portion of your crop on the market’s return to the mid 70s with a plan to incrementally scale up as prices move forward.

Don’t get caught in the trap of comparing this year to last year and thinking you priced too early. Things aren’t near as bullish right now and 94 cents seems unattainable at this point. Our best advice to producers is that only you know your true cost of production. Let it be your guide when pricing cotton rather than where the market has been or what your neighbor is doing.

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