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Cleveland: Feeling Bearish and Blue

Most of you know I seldom resort to using a title in my writings. I long ago discovered that editors were far superior in that arena. However, if I were to pen a title on this, it would read, “This Hurts,” or “USDA Was Right,” or “WASDE Knows Best.”

Possibly, I should title it “Where is Charlie Stenholm When the Cotton World Needs Him?”

It hurts in that I have turned bearish on the cotton market. I am falling for the old adage “Short Crops Have Long Tails.” I am falling for the continued short-term bearish technical signals. I am falling for the technical tea leaves that include increased open interest with lower prices. I am bothered that seemingly bullish news is met with lower prices.

I see a reduced crop in India, falling world carryover, a smaller U.S. crop, tighter supplies of high quality cotton, acreage reductions coming everywhere, and fund managers leaving the cotton pit.

Check the Indian cotton comments. Rather than a reduced crop, it is a disastrous crop. And still, the New York ICE moves lower.

Cotton futures prices from the nearby March all the way out to the March 2018 vary by little more than about 150 points. The March 2018 contract, two years away, shadows the current March. Textile mills do not need to hedge, the market is doing it for them. Growers have no need to hedge. Prices may well move lower, but why lock in a selling price that guarantees a loss.

As a well-heeled land owning banker commented, “I am not even going to lend any money to myself. I will make more this year just sitting out.” There goes another economic disaster for much of rural America, but we can always increase Washington’s SNAP funds.

The rub for cotton – the dirty shame of it all – is that most growers, current and past, want to get back into cotton.

Cotton stocks are at near historical lows in the U.S. The seed companies have delivered to the grower a batch of very high yielding, high quality producing cotton seeds that are the envy of the world’s agricultural industry. Yet two things are shutting the door on U.S. production.

The first (and only to be mentioned once, as I have already worn out the subject): cotton clothing has lost favor with the consumer in favor of chemical fibers. Consumers now wear chemicals on their back and against their skin instead of the fabric of our lives.

The more significant problem at the moment – and only at the moment – is the Chinese carryover, aka, the Chinese stocks – some 50-60 million bales of mostly poor to very poor grade cotton, hardly usable by most any standard and as much as five years old. But again, there is a country full of them, so to speak.

No one wants them, not even the Chinese, or especially the Chinese mills, I should say. The Chinese mills want to import quality cotton to maintain their reputation for spinning excellent quality high count yarns.

Presto, China will be back in the low count (coarse count) cotton business, and the cotton world will be in turmoil.

The Chinese have also built the largest coarse count yarn import industry in the world by shuttering the millions of spindles capable of spinning only low count yarns. Now comes the government, realizing that a fire sale is better than nothing at all – just like J. Walt Starr and cheap wine. If the price is low enough he will drink anything. So too, the Chinese mills are attempting to see how many, if any, of the shuttered mills can spin the cotton if it is essentially given to them. Once that is completed, they will announce their plan and the selling price that mills will be asked to pay for the low quality cotton.

The Chinese will essentially make the cotton available to mills at better than a sweetheart deal. However, the details have not been announced. And given that the Chinese New Year is in full swing, little is expected out of Beijing for another week at least. However, the impact will be to disrupt international coarse count spinning trade, export patters of raw cotton and drive the cotton futures market lower.

We had argued that the Chinese cotton was all but useless. USDA, to their credit, would not wipe it off the books, and they will turn out to be correct. Everything has a price, and, if the cotton is “given” to the Chinese mill, then it has value. In fact, it has great value.

Thus, the Chinese mill will drink the cheap wine, feast on profit, and leave the government to deal with any WTO or world market dumping problems. Those things take a generation to resolve anyway. But then, Mr. Stenholm will have to go to work solving cotton’s demand debacle.

In the meantime, the New York ICE is facing a dip into the 50s, with the potential of a trip down to the mid-50s.

Buy a gift of cotton today.

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