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Bears Growling on Harvest and Demand Challenges

Cotton prices were on their heels all week defending the 67 cent area and settled the week at 66.88 cents. This was the lowest settlement since August 16.

Merchants continued their attempts of forcing carry in the futures market and have all but succeeded. The nearby March futures contract is only 11 points below the spot December. The export sales report appeared to be distorted.

With harvest lows now being established at mid-October, the door has opened for a challenge of the 65 cent price support sooner than expected. Additionally, potential slippage down to 64 cents is now more recognizable. Nevertheless, the 65 cent price floor (64-65 cent) has held. Given the potential for improved demand, one should not abandon the 65-70 cent trading range. If broken, the next level of support will be in the 61-62 cent area.

Yet, U.S. domestic demand did hit a snag this past week as Cone Mills announced it was closing its White Oak fabric manufacturing plant in Greensboro, NC, effective at year’s end. The plant has survived some 112 years of continuous operation, and now the owners say they will outsource needed production from overseas mills – opening the plastic clothing polyester door a bit wider. The irony is that the mill was one of the very few left in the U.S. still manufacturing fabric, and that the mill is owned by a group formed by the U.S. Secretary of Commerce. Further, the plant used natural indigo grown by U.S. farmers.

So much for Washington’s “Made in America” lip service.

I admit to being prejudiced toward cotton, the Fabric of Our Lives. My prejudice does cause me to make mistakes. I beg your forgiveness. Of course, this comes just a week before the Texas A&M Polyesters and the Mississippi State Polyesters square off on the gridiron in their maroon and white imported, environmentally-polluting uniforms to see which team can claim the Polyester Cup for their respective state, each rich in cotton history and each now promoting plastic clothing. (Actually, all educational institutions are playing the same game. I am just picking on my favorites and the ones my limited knowledge encompasses.)

The universities’ penchant for wearing, promoting and selling polyester is ironic in that the Chinese government, because of major pollution problems, has forced significant closings of polyester manufacturing plants – the source of polyester sold by sports companies and big box retailers in the U.S. Additionally, the Chinese government has empaneled a national summit on the issue. Further, university research has tagged polyester as a source of both water pollution and food pollution in the U.S. and around the world – and consumers are lured into the web of plastic shirts and other garments.

The cotton bears obviously won the week, as prices fell 174 points on the spot December contract as the world merchandising industry continues to offer advice of lower prices. Given that the market is near the bottom of its long-standing trading range, it is difficult not to jump on their bandwagon of lower prices.

The weekly export sales report offered conflicting advice regarding price activity. Weekly net sales were very impressive, as 253,000 RB of upland were sold and another 17,700 RB of Pima were booked. Next marketing year sales of Pima and upland combined were a mere 13,500 RB.  Primary buyers for 2017-18 delivery were Vietnam (the best U.S. customer), Bangladesh, Turkey, China, Indonesia and Thailand. All except Thailand can be expected to continue to show up in the report most every week.

However, export shipments were very poor, as only 86,100 RB of upland and 5.7 RB of Pima were loaded on ships. This very low shipment activity led to numerous comments questioning demand. We have voiced export concerns for five weeks now.

Yet, most mills report their inventory is abnormally low – an indication of an immediate need for cotton. Likely, one or more mistakes were made in the filing of the export shipment reports, and the correction will be made in the coming weeks. Yet, if shipments have actually fallen to such a low level, then the USDA export estimate of 14.5 million bales will draw more attention.

Additionally, analysts’ rosy reports of improved world demand – including mine – should be questioned. Likely we are only discussing an arithmetic error in report filing. The issue of port backlog and/or infrastructure/labor problems was discounted, as the three major ports indicated the absence of any problems. Some suggested a low shipments number dovetails with the merchant’s desire to force carry in the market, but I have difficulty getting my arms around that issue.

While it is too early to find demonstrative market support in the On-Call Sales report, on-call sales ballooned to 139,587 – up about 3,500 on the week and up for the sixth time in seven weeks. Yet, mill fixations have also been significant the past six weeks, as mills have been marginally aggressive in fixing prices (buying futures contracts) on a scale-down basis.

Thus, mills are actively demonstrating their desire to take advantage of a declining market, just as the hedging chapter in the textbook so instructed. This has acted to slow the rate of price decline and should be expected to do so, thus providing limited price support. The closer prices drop toward 65 cents, the more the buying pressure from price fixations will try to limit a price drop below the trading range.

USDA’s 2017 crop estimate for the U.S. – 21.1 million bales – remains a dynamic estimate and, as such, will change. Based on grower comments, the Mid-South estimate could be as much as 300,000 bales high, as many growers are suggesting gin outturns are some 150-200 pounds per acre below actual 2016 yields. The October USDA estimate projected Mid-South yields were about only about 60-70 pounds lower than 2016 yields. This is an issue that bears observation and is not offered as a prediction.

I would be remiss not to again offer that the current trading activity represents a bearish price outlook, and the market is within 200-250 points of breaking below a major long-term price support level. I have suggested the 65 cent +/- price support would hold. However, I am in the minority, and more and more are abandoning the idea that the support will hold.

Give a gift of cotton today.

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