Cotton prices attempted to consolidate a bit this week in the face of weather problems around the globe, as well as Chinese mills seeking imports of middling and strict middling high grades.
Weekly U.S. export sales to China topped 82,000 bales, Brazilian high grades appear to be more limited than expected, and the Australian crop is smaller than expected and their upcoming crop faces a major setback due to an ongoing drought. Additionally, only a very limited volume of Australian old crop high grades are available, as Chinese mills are now discovering.
It is because of this absence of desired volume of Australian and Brazilian high grades that Chinese mills have become more active in searching for U.S. cotton. We continue to maintain the suggestion that Chinese mills are finding it necessary to import a larger amount of U.S. cotton than USDA projects.
Simply stated, the Chinese mills need imported high grades to blend with the large volume of lower grade stocks that make up the bulk of the Chinese Reserve stocks. While the Chinese Reserve does, in fact, hold much more than the amount of cotton the Chinese mills need, the Reserve stocks are of minimal quality.
Nevertheless, the price consolidation near 64 to 65 cents appears to have run into a wall. Thus, the long term price trend remains bearish. The 62 cent level is providing price support, but the next level falls down to 57 cents. The 67 to 68 cent level offers very strong resistance and should not be expected to be bridged in the absence of major crop deterioration problems in the U.S. or India, at least until January 2015.
Cash prices for cotton in both China and India have stabilized over the past week and have held firm. Mill demand in both countries is reported to be very good after several weeks of a slowdown in running hours. While this is more evident in China, Indian mills do report both improved yarn sales and running time. Additionally, southern mills have increased their use of locally-produced cotton in lieu of imported cotton.
Again, more and more attention is directed – and will continue to be directed – to both India and China, as they have become the dominate production and consumption centers of the world cotton economy. Nevertheless, the U.S. remains the world’s leading exporter and will likely hold that position for years to come, as U.S. growers hold a strong comparative edge in both production quality and shipping reliability. Too, U.S. seed breeders have a phenomenal record in bringing higher yielding quality cotton varieties to the U.S. grower.
Thus, the primary factors affecting the price of cotton will continue to be the productions levels in India, China and the U.S., as well as the level of consumption in China and India. As Chinese consumption slips, a more than one to one increase in consumption will occur in Vietnam, Bangladesh, Indonesia, Cambodia, Laos, Burma and other countries.
USDA will release its August supply demand report on August 12. Too, the results of the first objective field survey of U.S. production will be released. The report will be based on conditions of August 1.
The current USDA projection for the 2015 crop is 16.5 million bales. In the face of many suggesting the crop is going backwards, look for USDA to add another 500,000 bales or so to its estimate and increase its crop estimate to 17.1 to 17.2 million bales. Also expect some three quarters of increase in production to be shifted to exports, increasing the estimate above the current 10.2 million bales, possibly taking it to 10.5 to 10-6 million bales. Possibly, USDA will bite the bullet and increase its estimate of Chinese imports. Otherwise, they will kick the can down the road and increase the estimate at a later date.
Nevertheless, give USDA credit for its estimate of 2013/14 export estimates. The final tally will be near the USDA 10.5 million bale estimate. That tally totaled 10.53 million running bales and will possibly be upward to 10.7 million 480-pound bales.
The growing/harvesting season across the U.S. will stretch into January/February. The meaning – whatever the crop size and resulting world supply demand estimates that will be announced next week, the sure bet is that the estimates will change. Most likely there will be a couple of major changes by the spring of 2015.
My single expectation is that demand will be stronger and the current estimate of carryover stocks in both the U.S. and in the world will be lower than at present. Yet, the real drawdown in stocks is a year away, the 2015/16 marketing season.