Market Holds in Face of Tariff Rumblings
Cotton prices fought the battle with volatility all week, but settled higher as both the old crop May and July contracts settled above 82 cents. The new crop December contract traded above 78 cents, but settled the week at 77.94 cents.
Fundamentals remained much the same as the prior two months – very strong export sales and even stronger shipments, coupled with active on-call sales. Yet, on-call sales across all futures contracts declined during the week due to heavy fixations on the May contract. Mills were very active. As a result, on-call sales fell for the first time since February 9.
With just two weeks remaining before first notice day for the May futures contract, on-call sales will likely continue to decrease, as those positions must either be liquated or rolled to the July contract before first notice day.
Yet, uncertainty crimped market activity as all trading was fixated on impending tariffs in the U.S.-China tit-for-tat conversation. No new tariff restrictions are in force between China and the U.S., and none are expected in the coming three months – nor are any contemplated in the coming three months. Yet, the mere suggested action by either country gives speculative fund managers a case of nerves and increases market volatility.
World consumption continues to support prices, and the both the May and July contracts should continue to trade the 80-85 cent trading range. The May contract could receive a slight boost as a stronger taker of certificated stocks is expected to surface. The stocks are needed for export requirements. Weekly export sales registered a net of 367,600 RB of upland and 10,800 RB of Pima. Another 48,300 RB of upland were sold for 2018-19 marketing year delivery.
Vietnam continues as the leading buyer, as expected. However, Brazil was a buyer again on the week. Brazil is a major competitor with the U.S. in the world export market. The fact that Brazil is buying from the U.S. supports the fact that Brazil does not have any excess supply and must replace any bale it exports with purchases from the U.S. to satisfy its domestic mill needs. Too, it should be noted that India was again in the market for U.S. origin supplies.
Shipments were even more impressive, with 452,400 RB of upland exported and a marketing year high of 28.600 RB of Pima. Thus, total exports on the week were 481,000 bales. That pace has gone on now for the past four weeks. USDA is expected to increase its annual export estimate as much as 600,000 bales in the April world supply demand report. The current estimate is 14.8 million bales. Before the year is out, the U.S. will likely export in excess of 16 million bales. Given the improvement in domestic U.S. consumption, U.S. year-ending stocks will likely fall from the current estimated 5.0 million bales to as low as 3.8-4.2 million bales. Thus, export demand will continue to support prices in the low-to-mid 80s. The new crop December will be pulled higher by upward pressure on the May and July. However, December futures will be very sensitive to precipitation outlook for the Texas Plains.
The Chinese domestic auction has been slower than in the prior two years, but the government previously announced that offerings would be of lower grade. Given this situation, sales have been actually rather robust, but also heightens the necessity for Chinese mills to import more quality cotton. Thus, the Chinese demand factor continues to provide price support to the market.
Look for the April world supply demand report to be friendly for cotton. World consumption should be higher, and world ending stocks should fall. Most expect the U.S. crop will be lowered, but USDA seems to want to delay any changes until the June report.
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