Cleveland on Cotton: Market Enters Consolidation Phase

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    Cotton trading was relatively quiet all week as prices eased marginally lower. However, Friday’s trading did reawaken the bulls. The market has entered a price consolidation phase and is attempting to ease above the 10-day moving average. March’s failure to hold 125 cents did not break the price uptrend or the bulls.

    Technically, the picture being painted is one of indecision as the market sits at a crossroad in search of its path to continue the uptrend. The primary factors of bullish on-call sales, rising inflation, and the competition for 2022 land area will keep a floor under cotton prices.

    Cotton prices, i.e., ICE futures, are somewhat rigid downward and flexible upward. That is, price support in the expiring March contract at 119 cents and the new crop December contract at 101 cents appear very firm. The path of least resistance is higher.

    The price objective for old crop remains 130 cents and the new crop December continues to look at 107 cents with a possible target of 112 cents.

    On-call sales continue to be very price supportive, actually more so every week. Yet, export prospects are a challenge to higher prices. Export sales are ahead of the schedule needed to meet USDA’s export forecast of 14.75 million bales. However, export shipments, as we have reported for some time, are lagging the the pace needed to reach that estimate.

    In fact, export shipments are 3 million bales behind the year ago pace. USDA is gradually lowering its estimate of export shipments, down from 15 million bales in January to the current February estimate of 14.75 million. Unfortunately, the final number will be 13.75-14.00 million bales. If fortunate shipments could be as high as to 14.25 million bales.

    The trucking situation, coupled with the U.S. consumer’s affinity for anything Chinese, compels boats to return from the U.S. to China empty to more quickly get another boat load of goods headed to the U.S. consumer, regardless of whether the goods were produced or manufactured by child labor, slave labor province of Xinjiang. The U.S. consumer just wants to buy-buy-buy.

    Customs is seemingly doing a good job weeding out goods and products directly using child and slave labor in Xinjiang. However, companies that are apparently cooperating with the Chinese Communist Party are still allowed to ship goods and/or sell such goods in China. Senator Rubio’s office mentioned Nike as a company and the business press includes Adidas, saying they are playing both sides.

    More on Cotton

    It is ironic that yarn mills have generally been able to maintain their margins and spin at nearly full capacity while apparel sales are breaking records, and big box retail stores have found a consumer that is hungry for cotton good—all of this as the cotton production industry is having major difficulty in getting cotton delivered to yarn mills.

    Some mills suggest they would operate 24/7 if they could get cotton, including all the mills that remain the in the U.S. Shipping is not just a problem for the export market, it is also impacting the domestic market. Cotton consumption cannot keep pace with demand now, but unfortunately shipping concerns will likely begin to limit consumption later in the year.

    U.S. mills, basically located in the U.S. cotton belt, would use more cotton if they could get it. Add to that irony is that U.S. cotton is some of the cheapest in the world, at a time when cotton prices are near a record high price, and U.S. exports are severely restricted because the country cannot get it shipped.

    There is a great demand for cotton, for U.S. cotton. In fact, the market would support as much as a 20 million bale crop. Some suggest the U.S. could support a 23 million bale crop, possibly so. Yet, with U.S. production that large, the U.S. market would become even more beholding to the Chinese textile industry.

    The cotton industry would become as problematic to supply chain problems as those now wreaking havoc in the U.S. Thus, without a strong and viable domestic textile industry, those preaching for cotton production much above 20 million bales are also indirectly advocating 65-75 cent cotton. Yes, there are points for debate, but always remember to keep market price in mind.

    The cotton grower must have demand, but the grower surviving the long run will always be the low cost of production grower. The market could care less about any particular grower. The grower is charged with discovering how to produce for the market, not vice versa. Remember, the market is cold and very impersonal.

    Brazil is knocking one the door, burning as much rain forest as possible to increase crop plantings. More importantly, they have become very aggressive in marketing all commodities. They will increase cotton plantings and will grapple for market share as their comparative cost advantage can compete with the U.S.

    The bull market in oilseeds and grains is taking some of the luster out of cotton plantings. We had expected as many as 13.0 million acres planted to cotton in the U.S. The changing price ratios are suggesting an estimate should be 12.4-12.6 million acres. The insurance price for all but South Texas will be above one dollar per pound.

    Inputs will be very expensive, but the same factor that caused higher input prices is also working to add to the bull market for cotton and other commodities.

    Let’s add one more plus for the bull market, one that can disappear overnight, drought. The drought in the Southwest is spreading. The Coastal Bend region had had some relief, but other parts of the cotton producing Southwest are facing a more destructive drought than any in recent years. Every night I receive a few emails about it. The world is watching.

    The on-call sales ratio is the bull in the china shop and is not going away. That is why prices are rigid downward. However, Mother Nature wakes up and winks every day now. The speculators are winking back with her.

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