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Cleveland: Cotton Now in Clint Eastwood Mode

Right out of Clint Eastwood movies, the cotton market is following the script just as written last month, as well as his spaghetti westerns.

Cotton is now drenched in the Good, the Bad, and the Ugly as it watches a Fistful of Dollars disappear, all while just wishing and hoping For a Few Dollars More.

As I have often said, “The market is a tough taskmaster – she gives the test first, the lesson afterward.” Yet, for whatever reason, we seem to make her repeat that lecture time and time again. This week’s USDA February supply demand report only sharpened the bear’s claws as she prepares to maul through another level of price support, pushing for the 55 cent level, basis the nearby ICE contract.

Let’s hope the low 50s is not in store for this bear.

Staying in the “kick’em while they’re down mode,” why did it take so long to resurrect the market adage, “Short crops have long tails?” The price picture to be painted in the coming two months will get messier before it gets better.

The cotton market continues to follow the bearish path we suggested in January and will likely do so into the 2016 planting season, and probably longer. Presently, the market is moving lower in an attempt to judge the quantity of inferior Chinese stocks that will be dumped on the market, and to gauge how deep the New York ICE will fall before finding a bottom.

Typically, a lower market at this time of the season implies that the market is rationing land area to be planted to cotton (conversely, a higher moving market would be trying to buy more planted area). Yet, 2016 plantings are not on this market’s mind. It is all about Chinese intentions and the loss of demand. Yet, despite depressing oilseed and grain prices, world land area seeded to cotton will likely fall in 2016, and current U.S. grower intentions of seeding 9.1 million acres will likely fall below 9.0 million.

In its February supply demand report, the USDA reduced U.S. exports 500,000 bales, down to 9.5 million, and parlayed that reduction to ending stocks, increasing U.S. ending stocks to 3.6 million bales. The world 2015/16 cotton forecasts also included lower expectations of consumption and trade relative to last month. Consumption and imports were reduced for China, based on continued sluggish demand, and for Pakistan, where a slower pace of imports indicated reduced demand. World consumption was lowered 1.3 million bales, which included reductions for India and Brazil. With global imports nearly 1.0 million bales below last month, exports were reduced for Brazil, India, and Pakistan, in addition to the United States. Global stocks were forecast at just over 104 million bales.

The USDA analysis appears very volatile relative to China, Pakistan, India and the U.S. – the heart of the world cotton economy. Thus, major changes are expected in the coming months. Most notable are production estimates in India, Pakistan and China; imports by China; U.S. exports; and Indian exports.  In sum, the season-ending estimates, relative to the current month, are expected to reflect lower world stocks both inside and outside of China.

A number of years ago, a Louisiana man named Carville was highly instrumental in the election of a president by reminding everyone, “It’s the economy, stupid.” With apologies to James Carville, “It is demand, stupid…it is demand!”

In the absence of any dedicated industry effort to promote demand, cotton prices could fall to near or below the current world polyester price of 48 cents, before any turnaround in the market could be expected. It is demand, stupid! If I tell myself that often enough, then maybe I will catch on.

The signals that many thought they saw with respect to consumer tastes and preferences for cotton have entirely dissipated. Cotton is now formally classed as a luxury item by those who tabulate retail apparel numbers. Yet, the tough taskmaster is also a generous taskmaster. They will give us another chance to resurrect demand. There always is.

The question, however, is this – will we be smart enough to capitalize on that gift under the economics tree?

Give a gift of cotton today.

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