Cleveland On Cotton: Bright Spots But Still Plenty Of Shadows

    Cotton modules lined up in a gin yard. ©Debra L Ferguson

    At least the picture is prettier. A combination of lower than expected U.S. plantings, Cotton prices receive a degree of lift from Chinese buying, the Texas drought and a somewhat friendly USDA July supply/demand report.

    That combination pulled up cotton prices to a four-month high.

    The December ICE futures contract desperately wants to trade above 55 cents in order to reach a 66-cent objective. Yet, I fear it is burning a hole in the speculator’s pocket. Speculators have been very present in the price advance, and the trade has been a very willing seller all the way up.

    Bottom line: I like what the market is doing, but I greatly fear that it will need new bullish news to keep from selling back down to the 57-60 cent level.

    Plenty Of Cotton Elsewhere

    Yes, the U.S. crop could still be a complete mess, but both China and India have big crops, plus gigantic stocks on hand. Further, Brazil’s second crop, now more than 10% harvested, is funneling into export channels at whatever price is necessary for it to move.

    So, the only markets for U.S. cotton remain China, Vietnam and sporadic purchases from Turkey, Pakistan, Mexico and countries in Southeast Asia. Yet, for the past month, the business has essentially come only from China and Vietnam.

    That could be the picture for another two to three months. That said, this may be the time to take advantage of the option market, buying put options some 3 cents out of the money, especially if December moves above 65 cents.

    Hopefully, once again I will miss the mark, but I fear the excitement of December finally reaching near a 65-cent trade looks very top heavy. The price range has widened considerably, from the 57.50 cent low to 66 cents.

    Our Relationship With China…It’s Complicated

    The Phase One trade deal Trump negotiated with China has taken it on the chin from many who wished it to fail. Yet, for agriculture and cotton specifically, it has become a bright shining star.

    China now desperately needs to conclude cotton business with the U.S. Aside from anything relating to the pandemic, China has created a flurry of very negative news. That includes the Hong Kong invasion, the invasion and killings of Indian troops in a border confrontation, charges of slavery and child labor in Xinjiang, the crossing of swords with Taiwan and finally U.S. claims that China stole a U.S. Navy drone.

    Fulfilling the Phase One trade deal has now become a feather in the hat for the Chinese Communist Party. They point to that in an effort to take world pressure off those other egregious confrontations.

    Cotton purchases have been a major part of their agricultural dealings. Their strategy is intriguing. During the course of buying U.S. fiber, they now come forward and blame the U.S. farmer for all the problems in the world cotton industry. The carryover stocks level for U.S. cotton is estimated by USDA (and disputed by no one) at 6.8 million bales. China’s carryover is currently estimated at 35.4 million bales.

    Yet, China blames the U.S. for allowing the U.S. cotton farmer for growing too much. Their statement to the world is that the U.S. cotton grower is to blame for lower world cotton prices.

    China is now expected to be the largest export market for U.S. cotton, despite the fact that some other growths – notably Brazilian and Indian – are cheaper priced.

    In fact, sales to China over the past three months totaled 2.5 million bales. During the 2019-20 season, with four reporting weeks remaining, sales to China have totaled over 3.7 million bales.

    Granted, some 1.6 million have yet to be shipped, but by the end of the season that should drop to one million or less and it is common place in the cotton industry to carry over the remaining shipments into the next marketing season.

    To repeat, China will purchase some 3.8 million to at least 4 million bales from the U.S. during the current 2019-20 marketing year — and more business is coming in 2020-21.

    Going Into Inventory?

    Yet, the fly in the ointment is that, practically speaking, most of the world textile markets are near-shuttered or, at best, running on fumes. Yes, business is improving, but very slowly.

    China is not buying cotton for immediate use. It is buying cotton to further increase its 35-millio-bale carryover stocks level, as if they need stocks.

    With all its “bad will,” it is attempting to buy a little good will. China is about the only market for cotton right now. However, those stocks will still hang over the market and do nothing to boost prices.

    Simply put, the Chinese government will pay the carrying cost instead of the U.S. government.

    Breaking Down The S/D Numbers

    USDA’s July supply/demand report held no surprises, save for that a few expected lower world consumption along with a smaller crop in India and China, as well as a greater reduction in the U.S. crop.

    More on Cotton

    USDA lowered the U.S. crop to 17.5 million bales, down 2 million from last month’s 19.5 million. U.S. carryover was reduced 1.2 million bales from 8.0 to 6,8 million as U.S. exports were lowered from 16.0 to 15.0 million bales.

    A smaller crop coincides with a lowering of exports. World production was reduced from 118.7 to 116.3 million bales, but world consumption was lowered only some 100,000 bales, from 114.4 to 114.3 million. Thus, world carryover was dropped from 104.7 to 102.8 million bales. Note that most of the reduction in world production was attributed to the United States.

    July is the prime fruiting month for the U.S. crop and also for most of the northern hemisphere crop, so weather remains the prime fundamental. I am expecting the crop to slip down to 17 million bales, given the problems in Texas, but Mother Nature can still pull off a miracle.

    Additionally, signals are emerging that the southern Xinjiang crop is under stress. Also, the Turkish crop may be further lowered.

    Also, it’s hard to say how much cotton India has on hand. USDA has historically assumed considerably more storage space for cotton in India than India says exists. It’s a long-running disagreement that USDA should at least recognize. Mostly, it has paid lip service to the question.

    Yet, the international trade has not jumped into the fray — and no doubt they know more than I do.

    Mother Nature must take the U.S. and world crops lower if prices are to hold the 65-cent area. Demand fundamentals do not demonstrate any desire for higher prices.

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