By Dr. O.A. Cleveland
You just can’t hold a good man down (or woman). They find a way to survive. The ole salty male cotton grower is famous for crossing the gender line with his saying, “Cotton is like a good woman. It promises less and gives more than anything else in the world.”
The cotton market experienced a very fun and exciting week as trading focused on strong fundamentals factors, both of the bullish and bearish variety. Many have been left perplexed with the strength of cotton prices in the wake of what they view as mostly bearish fundamentals. Yet, we pointed out two weeks ago that international bullish factors were not only alive, but goring their collective horns into the bears.
The narrow four cent trading range 63-67 cents still dominates within the larger range of 60-69 cents. With new surprises on the way – compliments of Mother Nature and the ever-so-difficult choices of consumers – the market will likely continue to back and fill the 63-67 cent range as December passes through the time spectrum.
So many fundamentals…and Brexit. Since it is centered in the United Kingdom, let’s just use a local quote, “Much ado about nothing.”
Most forget that the U.S. financial industry predicted that the world was coming to an end with respect to the power of the U.S. dollar and the U.S. economy when Great Britain decided to couple its economy with Europe. They yell about the strengthening of the U.S. dollar. Yet, in reality, it was the English pound sterling that weakened instead of the dollar specifically gaining strength. The strong dollar is relative to the pound sterling – and the UK does not import more than a Mississippi tug boat load of U.S. cotton.
Yes, there will be some financial industry transformations, but few that will impact the cotton industry or the local businessman. The impacts relative to U.S. commodities will be in international high wire circus acts – the trading of derivatives of derivatives of derivatives of derivatives. There are not too many growers, mills, co-ops, or merchants for that matter that will think about the price of the third or fourth derivative’s effect on either cotton futures or the cost of borrowing furnish money.
Throw that Brexit impact away, just as the cotton market has.
Then comes China and India and Brazil, just to highlight the big boys and girls on the street. All three countries are suffering the impacts of a very unkind Mother Nature. The Brazilian crop failure has been discussed the past month. China – initially fret with cool, wet temperatures and already behind the eight ball – is now suffering from flooding, pests and an anomaly of problems. The Chinese crop will likely fall below 20 million bales.
The Indian crop, coming off a 500-year failure of the monsoon in 2015, continues nervous about adequate moisture as the expected 2016 strong monsoon continues to be late. Cotton plantings are well behind, but they do enjoy a much expanded planting season. Upwards of more than eight million acres are yet to be planted. India was hoping to produce a crop of 32 million bales or more and is facing a harvest of less than 28 million bales.
The 2015 Indian crop is effectively sold out, and India now is left as a net importer until the November-December time frame. The production season begins very short of moisture with prices at a two-year high.
Chinese mill use is expanding, as reserve sales continue to far surpass all expectations. Since the sales began some eight weeks ago, 98.3% of all offered cotton has been sold. The government has had to slow the sales, as sale mechanisms cannot keep up with sale activity. Further, Chinese mills continue to scramble for cotton. The smaller forecast 2016 crop has mills on edge to insure they will have adequate coverage in for the fourth quarter of 2016 and the first three quarters of 2017. Additionally, the opening of new mills in the vast Xingjian region has accounted for more cotton than had been expected and has, in effect, increased the projected 2016 offtake.
As mentioned in the last newsletter, this represents an increase in cotton demand – believe it or not!
The sale price continues to register above 90 cents, well higher than the Cotlook A Index and ICE board as well. Yet, mills now know the specific quality they are buying, and they are hungry for reserve cotton. Too, at 90 cents per pound, it is still some 60 cents or more less that what they had to pay last year under the old Chinese program.
The reserve will continue to sell stocks for another two months, and there is no reason to expect sales to fall, especially with the 2016 crop getting smaller. Yet, China can limit sales at the discretion of the Finance Ministry. The reason sales are scheduled to halt at the end of August is to not interfere with the orderly sale and movement of the 2016 crop from the farm to the mill. Since the sale began two months ago, the program has sold nearly five million bales of cotton.
China is well on its way of solving the oversupply problem it dropped on the world market. In fact, sales have been so strong that the 2017 December ICE contract and several other contract months posted life of contract highs this week.
Yet, the increased use of domestic Chinese cotton has all but cut off yarn imports from India, Pakistan and the U.S., and severely reduced imports from Bangladesh, Indonesia and Taiwan. Imports from Vietnam will continue to expand, as the Chinese mills own most of the Vietnamese spinning operations. Thus, it is the Chinese business that is driving the market and will continue to do so.
One caution to this bullishness. The price of polyester is about 50-55 percent of cotton. Thus, any increase in cotton above 67-69 cents runs the risk of increasing polyester consumption at the expense of cotton.
On the heels of this bullishness, the USDA June 30 planting intentions put a brief scare in the market, as plantings were 461,000 acres above the March intentions report and some 600,000 acres above analyst expectations.
U.S. growers have planted 9.82 million acres of upland and 199,000 acres of Pima. Total plantings were 10.023 million acres, up 17 percent above 2015 plantings. The larger-than-expected plantings were not surprising, as the New York December price increased from 56-58 cents during February-March to about 64-65 cents during May.
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