The cotton market performed much as expected this past week as the New York December contract moved toward its weekend settlement trading near the 66.60 cent level, up approximately 165 points on the week. The distance contract months were all higher, but not as much, highlighting the cash market’s demand for immediacy and/or delivery prior to the start of the new calendar year.
The delay of any quantity of deliverable 2014 world production supplies, coupled with the very limited availability of old crop export grade cotton, has kept a bit of a fire burning under the market. Yet, we had cautioned that the 67.00 to 67.50 cent level would present very heavy price resistance to any rally. That resistance held this week with ease, and will likely prevail in the coming two weeks in advance of the September 11 USDA supply demand report.
Chinese demand for high grade cotton has been the main fundamental factor pulling prices higher. Additionally, most mills around the globe have tended to operate hand-to-mouth and have maintained only a very limited inventory of raw cotton. Since new crop cotton (2014) is generally unavailable, and will not be until November/December, cotton supplies available for immediate delivery are limited.
As we have stated almost weekly, there are ample supplies of cotton in China, but only a limited amount is available to the market, and an even lesser amount is desired by the Chinese mills that produce high quality yarns and/or high count yarns. Thus, the price spread paid by mills for the high-end qualities of cotton around the world has reached price spreads that heretofore have been almost unknown.
Cash prices for M-1-1/8, premium mic have reached upwards to 1500 on December for mill delivery. M and SM 1-1/4 grades are in the 2500 to 3000 on December range. These levels have elevated the New York ICE December futures for base grade SLM 1-1/16 to the 67 cent level. However, the New York base grade, long the standard for the U.S. textile industry, is no longer considered “quality” cotton. Nevertheless, prices for the desirable grades continue to be priced off the New York market.
U.S. seed breeders have introduced varieties that now allow U.S. producers to harvest, on a regular basis, 1 1/4 inch staple length, premium mic, with strength consistently above 31-32-33 gpt. It is this cotton that modern mills are now looking to source and the grades that are commanding the high premiums.
The demand for U.S. cotton remains exceptionally strong in the export market. China continues to lead the pack, but some 18 to 21 countries are in the market every week as buyers of U.S. supplies. This highlights the availability (actually the concern of non-availability) of cotton outside China.
We have spun that record so many times that it is completely worn out, yet many market participants have yet to understand that China is still the world’s major importer of cotton. They may have well over a year’s supply of cotton on hand, but much of it is undesirable. Thus, China remains the major player in the price equation for both world and New York cotton pricing.
Too, Chinese mills have recently seen an increase in yarn demand and have increased their operational time. While yarn margins have not recovered to the point of excitement, the mills recognize that inventory must be maintained as orders have become regular. U.S. exports were part of that, in that net sales for the week were 247,700 RB of Upland and 2,900 RB of Upland. China was the major buyer, taking over 90,000 bales.
Weather patterns improved only slightly on the week, and major concerns continue to exist in both India and the U.S.
Look for the next supply demand to lower world production some 500,000 to 750,000 bales. Consumption should see another increase, although very minor, but world ending stocks should be lowered. More importantly, world supplies outside of China should be lowered. The U.S. will continue to build on its exports to China.