By Jim Steadman
The demand side of the price equation for cotton flexed its muscles this past week and shot the market higher, as prices reached a five month high.
At every turn, bullish news awaited cotton traders. The record high quality of the U.S. crop has mills scrambling to purchase qualities not seen in such volume. Export sales of U.S. growths climbed above 1,000,000 bales for the month of December alone. The cotton polyester-polyester price ratio surged in favor of cotton, and international currency fluctuations moved strongly in favor of cotton.
The five-month 69-73 cent trading channel was broken, and the market is now searching for higher prices. Excellent price support rests between 69.50 and 71.50 cents. Likely, strong support also exists at 72.50 cents, and that may well be a new bottom. However, a strong wave of fund profit taking could swamp that level.
The next test to the upside will be just above 75 cents, with the market set on trying 78 cents again. I previously wrote that 78 cents was “pie in the sky.” I continue to think that is true, but I am of the opinion that 75 cents will be breached.
On the heels of ideas for higher prices came speculative index fund managers pouring buckets of money in near record portions into long cotton futures positions. Textile mills have expressed all but an insatiable appetite for cotton. They are now caught with their needs poorly covered and will, themselves, have to push prices higher to fill their intermediate needs – much less their third and fourth quarter requirements. More importantly, mills have been caught essentially short the market at record levels.
The U.S. dollar surged to a 14-year high, suggesting that consumer textile prices will be more affordable. Technically, the market is poised for higher prices, thus strongly supporting the market fundamentals call for higher prices as well. Yet, do not expect prices to run away to the upside, but we will see prices ease higher.
The only negative in the market goes all but unnoticed – the concern that rising cotton prices will cause the destruction of demand. Demand destruction is not uncommon in the cotton market, as, like the demand for any commodity, the consumer’s appetite will sour if a price rise goes unchecked.
The 2017 Beltwide Cotton Conferences concluded with participants expressing the news of an improved profit position for growers and suggesting that 2017 plantings in the U.S. will be between 10.9 and 11.2 million acres – possibly increasing as much as one million acres over 2016 plantings. Look for the two major February announcements to concur – the National Cotton Council’s survey of grower intentions and USDA’s annual projection released at its annual outlook conference. The next report to follow those will be USDA’s March plantings intentions report.
Plantings of that magnitude will be slightly bearish, as world plantings will also be higher. However, as consumption increases, it is possible that world consumption in 2017-18 will exceed world production. Thus, world carryover could be facing its third consecutive decline – a prospect not envisioned just 60 days ago.
World textile mills and apparel manufacturers are caught in the clutches of increasing polyester prices. The price increase is a direct result of environmental damage done across Asia by the pollution caused by polyester manufacturing in China.
We have long discussed polyester as a “chemical” fiber and as a “petroleum-based acid fiber.” China has now forced the closure of numerous polyester manufacturing facilities due to widespread pollution. Textile mills had fallen in love with polyester due to the considerable profit it offered over cotton, as cotton was about double the price of polyester. Now, mills and apparel companies are discovering they were directly contributing to pollution and environmental damage across China.
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