An exciting, bullish week for cotton prices turned bearish, as prices ran ahead of demand.
Export sales pulled back, swamping the price advance in its wake. As sales bit the bullet, prices remained weak as more specific details of the Chinese Reserve sales were announced.
Too, USDA released of its April world supply demand report. With all of that, the cotton market remained in its narrow 5-6 cent trading term trading range.
Certainly that will not be the case as we move forward, but it is reality for now. Again, to repeat the long standing comment, Mother Nature holds the key to the new crop contact prices. U.S. cotton acreage seems to further expand. Demand holds the key to the old crop May and July contracts. Certainly adverse weather can affect the July, but not the May, as the May futures contract will soon give way to the July.
In that regard, the Mid-South has had a virtual blizzard this week. Blizzard applies to the cool, wet conditions that seemed to dominate much of the Mid-South and a portion of the Southeast. Yet, those conditions most likely prevented the cotton grower from the typical anxious start to begin planting too early. The last two weeks in April and the first three weeks in May typically offer the Mid-South grower a much better opportunity to have a successful planting season.
Of course, the Southwestern grower has from now until early July, depending on the specific location within that vast region. The West is far into its planting season.
The Chinese were very true to their preannounced script. First, the program gives every indication that the government is serious – finally – about not dumping cotton on the market and, in fact, acting to stabilize the market. While the sales will begin later than first advertised, the difference was inconsequential. Too, the volume could possibly be larger than expected, but will be based on how well the disbursement is received by domestic mills.
The news was that imported cotton will be offered first. This bodes well for the Chinese domestic mills and world demand, because Chinese mills have been clamoring for imported cotton since it is high quality – a real need for the mills. It does not necessarily slow or stop the importation of new purchases, but rather fills the immediate day-to-day needs.
Other highlights include the following:
- The sale period will run from May 3 until August 31.
- The maximum amount sold is capped at about nine million bales (2 mmt), not the 11 million bales previously announced.
- The Chinese Finance Ministry was/is involved in the process.
- Daily sales are limited to about 135,000 bales.
- Once the 2016 harvest begins the sales will close – September 1.
- The Reserve will continue to purchase cotton, but only high quality grades and staple – a new requirement that actually was eased in during 2015.
The government noted they may amend the program. The announcement suggests the Chinese will allow the market to function as normal market-driven events. There were enough earlier announcements that the program intent had already been faded by the market participants and was thus a non-event for prices.
Last Thursday-Friday’s sell-off was the result of the weekly export sales. Based on higher prices of the week, and this week as well, export sales were a net of 84,600 RB of upland and 14,600 RB of Pima. Turkey and China were the primary buyers of upland, while the major Pima purchasers were China, India and Peru. Shipments were 184,800 RB of upland and 11,400 RB of Pima. Shipments remain well on tract to justify a 200,000 bale increase in the USDA export estimate.
The market suggested disappointment with the report. Yet, with pencil in hand, it projects increasing export sales. The market had come to “expect” sales of a minimum of 125,000-150,000 bales of upland. The “reality” simply did not meet expectations. Nevertheless, sales began to slow once the market moved above 58.50 cents.
The April supply demand report was neutral-to-supportive to the market. The U.S. crop was lowered 100,000 bales down to 12.9 million (the actual adjustment was 73,000 bales lower, but we report in 100,000 bale increments). That lowered the estimate of carryover stocks down 100,000 bales to 3.5 million. Again, carryover will to fall to 3.2 million as exports sales will be increased, I believe.
World carryover was lowered to 102 million bales, down one million bales and closer to the 100-101 million bales, I expect, by the end of the July 31, 2016 marketing year. USDA increased its estimate of world consumption, lowered its production estimate and made accounting adjustments to prior years to arrive at its one million bale decline in world carryover.
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