Cleveland On Cotton: Nothing Bullish In The Market…Not Even O.A. Cleveland

Cotton picker dropping cotton module during harvest. ©Debra L Ferguson

The AgMarket Network group hashed out USDA’s August supply/demand report and seemingly agreed the report was particularly bearish. Yet true to form, the market traded slightly higher on the heels of the report.

However, by week’s end trading turned negative, validating the bearishness of the group’s discussion. The group did generally think the 64-cent level, basis December, would probably get another look and even possibly 65-66 cents.

All agreed, though, that it would take a weather event to push prices above 65 cents and warned that the outlook could see prices fall into the mid 50’s or lower.

Nevertheless, it is generally felt that China has purchased all, or probably more than enough, of the cotton it needs. My concern is that only a large purchase of U.S. cotton by China offers the absolute only only hope to trade to 65 cents again.

Further, it seems that I am the big Bear in the room. Usually, I tend to find bullish optimism, but it’s just not there now.

Yet, the broad 57.50-65.00 cent trading range remains in place. The near-term will have to break below 61.50 cents to pressure the market lower.

The market has tried time and again to breach the 65-cent level, failing each time. That resistance level has become very firm. Another failure by speculators to break above that level will likely mean a swift retreat to 61 cents and set up a forthcoming test of the 57.50 cent price support level.

If speculators tire of bumping heads with 65 cents, they will soon exit the market and it will drift lower and attempt to break below 57.50 cents.

Projected Carryover Increases

In its August world supply/demand report, USDA increased its estimate of world cotton production some 1.25 million bales, increasing it to 117.5 million bales. World consumption was decreased, in line with the expanding impact of the pandemic, down to 113 million bales, or a 1.25 million bales decrease.

The result of these changes was to increase world ending carryover for the current 2020-21 marketing year to 105 million bales.

The estimated world stocks to use ratio is approximately 93%, implying, as has been stated in prior reports, that the world essentially has all the cotton it needs before the 2020 crop year harvest begins.

Additionally, USDA increased its estimate of U.S. production from 17.5 to 18.1 million bales. This increase reflects the ever-improving seed varieties available to U.S. growers.

The estimated average U.S. yield was a record 938 pounds per acre. The Midsouth region (Delta States) was also projected to have a record yield, as was Texas, by far the largest producing state in the U.S. Year ending carryover was increased 800,000 bales, up to 7.60 million bales.

The bearishness of the report was born out in the following:

  • A significant increase in world carryover
  • A significant increase in carryover in world exporting countries.
  • A significant increase in U.S. ending carryover.
  • A significant increase in carryover in countries competing with the U.S. for export market share.
  • Record-low annual U.S. cotton consumption.

How Quickly Things Changed

The state of the world textile industry, and specifically the U.S. textile industry, is such that Mother Nature’s own natural fiber, cotton, is disappearing from use in many fabrics. It is rapidly being replaced throughout the fabric world by an acid-based petroleum derivative synthetic fiber – and all that at a time when cancer and other principal diseases consume trillions of dollars in medical research.

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You wear that acid-based petroleum derivative fiber, and…be sure to scratch that itch on your back.

The individual cotton grower himself is challenged to wake up. Remember, it was only 20 years ago that the U.S. domestic textile industry consumed over 10 million bales of cotton annually. It has taken only 20 years for synthetics to essentially destroy the industry.

Granted, there is a line of thought that USDA has miscalculated the August estimates and the September report will shine a light on a much smaller crop and much better consumption. The crop may be smaller. As much as I have praised the seed companies, I also suggested the 2020 crop would be much smaller.

Not so, according to USDA. Thus, for me and other second guessers, stop second guessing the new yields. Also, I second guess USDA a lot. Yet, I have always been quick to tell you they are the best going.

The new varieties demonstrate a quantum leap in yield. Quite frankly, it the seed companies, almost by themselves, that are keeping the U.S. grower competitive in the world market. They are focused on sustainability and they are focused on assisting domestic textile mills.

A Shortage Of What The Market Needs

I would love to see cotton move up to 75 cents a pound. But, it will not. Period. I have repeatedly commented that markets depend on demand. Simply, cotton demand is miserable.

Those preaching a resurgence in demand are simply feeding you a line. Criticism directed toward me has generally come from those who pinned me as always being bullish. I confess to always wanting to be bullish.

The August 13 AgMarket Network teleconference can be replayed at https://fccdl.in/VZLnb24SJY

There is nothing bullish in the cotton market. Please, please let my analysis be incorrect. Prices will attempt to trade the 61-65 cent area going into the September USDA report, but any rally will likely be over then.




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