Cleveland: Return of the Bulls
March 29, 2011 By Dr. O.A. Cleveland
Professor Emeritus, Mississippi State University
For Bayer CropScience
The cotton market came back strong last week returning prices to the two dollar mark. The May and July will likely work two between $1.90 and $2.10 for most of the time. The bears will attempt to pull prices into the lower $1.90s while the bulls will be pushing for the $2.20s.
The Call Sales situation remains the primary bullish factor in the market. The bears are talking up the expanding concerns of a slowing in demand. Nevertheless, the level of supply continues to decline while U.S. export sales increase. The new crop December contract appears comfortable in the $120s as it awaits Friday’s USDA Plantings Intentions Report. The trend of near daily limit moves has slowed, but longer term volatility will continue. After next week’s USDA intentions report the market will begin to attach more importance to the expanding drought in Texas and other parts of the Cotton Belt. Just as in any other year Mother Nature will have her say. However, given the very tight balance between supply and demand, weather problems have the potential to send the December to the $150s. But don’t make any pricing decisions based on possibility of future weather events.
USDA released it final 2010/11 final ginning report for the 2010 crop, dropping ginning some 220,000 bales. Thus, the April supply demand will drop the U.S crop from 18.3 to 18.1 million bales.
As has been speculated for two months, USDA is expected to raise its export estimate above the current 15.75 million bales. Additionally, annualized cotton consumption by U.S. textile mills for the current marketing year is 3.8 million bales, or 200,000 bales above USDA’s 3.6 million bales estimate. The February annualized domestic consumption was 3.9 million bales. The combination of stronger demand and a smaller crop suggests U.S. cotton carryover could be as low as 1.3 million bales. This is a “scary” proposition in that such a forecast would reflect a stocks-to-use ratio of under ten percent (as low as 7%), an implication of yet new price highs for the May, July and December futures contracts.
Export sales for the current season during the week ending 3-17-2011 were a net 331,100 RB of Upland, a major surprise given the “buy backs” by U.S. merchants the prior week. Upland sales for 2011-12 were 213,800 RB (running bales) with major buyers being China, Turkey, Bangladesh and Mexico – the usual suspects.
While U.S. mill consumption is an increasing concern, it has risen to about world demand. Some are formally suggesting that demand will decline as much as two million bales. Yet, with U.S. exports climbing and the recent dip in prices, it would not be surprising to see yarn demand regroup and maintain demand at its current level. Cotton is expensive above $2, but the market appears to be near equilibrium with old crop at $2 and new crop at $1.25.
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