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Cleveland: Market Yawns as It Closely Watches China

The release of the January supply demand report confirmed our long held idea that the world crop was considerably short of USDA projections. Yet, the market exhibited its disappointment that USDA’s crop reduction was not sharp enough. Despite a two million bale reduction in both world production and consumption, the market yawned and moved lower.

The troublesome world economic activity, declining oil prices and slowing business activity have left cotton demand in its wake. While job growth and some other economic indicators have blossomed, much of the services economy with its higher wages still flounders, and, with it, cotton demand.

Again, as a broken record, cotton prices can only drift marginally lower until demand surfaces. It is going to take more than a cold blast of that delightful breeze coming off the Canadian Rockies to push cotton prices higher. As refreshing that such a blast would be to the overheated U.S. cotton belt, it is a new blast of fresh demand from the world consumer that awaits higher cotton prices.

The market continues to consolidate near the 62 cent level as it pushes into 2016. Most of the price work has be just above 62 cents, but the weekly close just below 61.50 cents at 61.41 was a bit of a kick to the seat of the pants.

The market had been supported all week by seeming fresh price fixations, as well as new mill buying. The prior week’s exports had been strong, coming in at a net of 171,000 RB of Upland and 27,100 RB of Pima – a marketing year high. The primary buyers of Upland, as expected, were Vietnam and Turkey, the two largest consumers of U.S. cotton. Yet, actual shipments were only 79,400 RB – down over fifty percent from the prior week.

During the course of the past year the market has found excellent support at the 60-62 cent support level. But the current challenge, if not met soon, will allow prices to drift into the high 50 cent range – a near disastrous outlook for cotton pricing.

My suggestion, and a rather strong one at that, is that the 60 cent mark will hold. Demand, weak as it is, will pull prices back to near the mid-60 cent level.

In its January report, USDA lowered world production down to 101.6 million bales and dropped carryover to 102.8 million. World consumption was estimated at 110.9 million bales. U.S. production was marginally reduced some 100,000 bales to 12.9 million. The primary changes were based on smaller crops in Pakistan, down 800,000 bales (7.2 million); China, down 500,000 bales (23.8 million), and India, down 500,000 bales (28 million). Additionally, U.S. consumption was lowered 100,000 bales and was estimated at 3.6 million bales.

Market concerns now center on the potential decision by China to dump its low grade stocks on the local Chinese market, thereby limiting the amount of low count cotton yarns that would potentially be imported by China. There has been an unusually sharp increase in trading of the Chinese domestic futures market during the past month.

With this has been verbal speculation that the government was considering selling from the former “strategic reserve,” with the plan to sell “at any price.” This speculation appears to have gained a foothold and is now being broadcast by numerous sources inside the country. The price impact would reach across boundaries and throughout the world cotton economy, as it would distort yarn trade patterns, to say nothing of the spinning industry.

This potential activity has left the world cotton industry with a major fear of a negative price impact and has set the market back on its heels. How this plays out in the short term will keep the market in a defensive posture.

Further, in the absence of the U.S. Secretary of Agriculture taking action on the oilseed program, cotton prices will continue to struggle within the 61-63 cent area, even facing a battle to maintain 62 cents.

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