Cleveland: Mill Demand Drives Cotton’s Recent Bulls

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Demand has become the key word in the cotton trade as global export sales soar, taking prices along for the ride.  We have harped since July, and have almost had to taste the proverbial crow a time or two, that mill margins were increasing and prices were undervalued. Demand has now pulled prices to the door step of 80 cents and seems to show no signs of weakness.  

Mill support at 68-69 cents held strong and support moved to 72-73 cents. The past six weeks has seen that same support now move to the 75-76 cents. Now pushing 80 cents, the nearby March contract will most likely back and fill a bit before blowing through the 80 cent mark. Let’s not get too overconfident, but mill demand will take this market higher, possibly to the 86 cent level. 

A number of forces are at work, and more than just demand. Of course the Chinese domestic pricing policy is supporting the world price as cotton is withheld from the market. The Indian and Pakistani crops were reduced by the poor monsoon.  Political unrest is expanding in Pakistan and is threating both the supply and demand side of the market. The African Franc Zone (Mali) is locked in all-out war that could preclude any 2013 production. Now, word comes that the 2012 Chinese crop, while larger than expected, has significant quality problems (generally confined to the eastern crop).  While the Chinese government is now selling out of its strategic reserve to domestic mills, it is the only seller in the country.  The local mills can only buy from the government without paying an import penalty, and they are forced to pay approximately 135 cents per pound, subject to quality premiums and discounts. At the same time, the government continues to purchase cotton from farmers for the strategic reserve. That is, the government is the only buyer and the only seller, and they are still buyers. 

Export business has become so brisk that USDA will be forced to increase its export estimate again in February. The January increase was 400,000 bales, up to 12.2 million bales. Don’t be surprised to see as much as another 400,000 bale increase in the February report. 

Further, don’t be surprised, when all is said and done that 2012-13 export sales approach 13 million bales. Mill demand is rapidly increasing in Turkey, Bangladesh, Vietnam, Cambodia and most other countries. Demand is increasing and more than offsetting the slower spinning in China.  (Spinning mills in China have to pay the government such a high price for cotton that they are losing money.  Thus, most mills are importing large quantities of yarn since there is no quota on imported yarn. They do continue to spin some cotton, but only in limited volume.)

U.S. export sales for the week were a net of 339,000 RB of Upland and 28,700 RB of Pima. Actual shipments are some 800,000 bales ahead of last year’s pace and mills have only booked a small portion of their forward needs. The Chinese have far too much invested in their strategic reserve stocks to risk dumping them. They will be worked off slowly. Note that the first sales this week were from the 2005 crop…seven year old cotton  However, the mid 80s might be all the legs this market has.

Cleveland is a Professor Emeritus, Department of Agricultural Economics, Mississippi State University.

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