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Cleveland: The Bear/Bull Balance Continues

Cotton prices ended the week lower, but tended to make gains after triple digit losses in trading that followed the USDA release of its September supply demand report.

As suggested a week ago, a neutral WASDE report would be taken by the market as bearish. It certainly was, and the market suffered nearly a 300-point limit loss on the heels of the report. The remainder of the week was spent consolidating slightly higher and closing higher three consecutive days, only to see small losses again at week’s end.

The trading range – 65/66 cents on the low side and 68/69 cents on the top side – remains in play. An expanded range would be the eight cent area between 64 and 72 cents. However, the much tighter four cent range should be well entrenched.

While the September world supply demand report was the feature of the week, a number of other news releases and market comments were ingested by the market. The weekly export report was good but not impressive, as had been the prior five. On the demand side, reports of further fiber market share loss for cotton were reported, and the negative impacts of clothing made from synthetic fibers also gained traction in some reports. Finally, the absence of cotton not being included a WTO complaint filed by the U.S. government was a major surprise.

In its world supply demand report, USDA raised its estimate of world cotton production some 900,000 bales, up to 102 million bales. Major changes were noted in India (down 500,000 bales), Australia (up 700,000), the U.S. (up 260,000), Pakistan (up 250,000), Turkey (up 200,000) and the Franc Zone (up 180,000 bales). World consumption was little changed.

Since beginning stocks were adjusted lower, world ending stocks were only 200,000 bales higher than the prior month’s estimate and were estimated at 90 million bales (stocks as of 7/31/2017).

It was a mild surprise that USDA did not increase its estimate of U.S. exports, given this season’s rapid sales and shipment pace compared to prior years. Additionally, with the crop estimate now pushing 16.2 million bales for the U.S., it was expected that a portion of the increased crop would go for exports instead of being added to carryover. USDA put the crop increase in carryover. The U.S. carryover is now estimated at 4.9 million bales, up 200,000 bales from last month.

Net upland cotton sales for the week were 136,400 RB of upland, 11,800 RB of Pima and 26,200 RB of upland sold for the 2017-18 marketing season. While this represented a slowing in sales compared to the five prior weeks, prices had been close to top end of the trading range for much of the week covered by the sale period. Thus, some of the mill buying enthusiasm had slowed. Shipments also slowed, but only marginally. The major buyers of upland included Indonesia, Vietnam, China and South Korea.

The U.S announced WTO challenges against China for price supports for rice, wheat and corn, claiming the Chinese price supports are some $100 billion above the WTO limits. It was surprising that cotton was not included in the complaint, given the selling price for reserve cotton relative to the price paid by the government to growers in building the reserve. That says nothing about the subsidies being paid to the manufacturers of acid-based chemical fibers coming from China.

The cumulative subsidies that U.S. and other world cotton producers are facing from China likely reaches into the TRILLIONS, and the U.S. Trade office is talking about mere billions (with all due respect to the late Senator Everett Dirksen).

This is not to negate the damage Chinese subsidies have inflicted on producers of the food and feed grains as claimed by the U.S. However, those claims are dwarfed by the cotton and acid-based fiber subsidies that U.S. and other non-Chinese cotton growers have to battle for survival. The omission of cotton was nothing other than a fragrant failure of U.S. Trade Representative and its willingness to ignore Chinese predatory pricing policies. It is as if the U.S. government has no will to stand up for U.S. agriculture. Yet, the real concern is that Washington and the U.S. Trade Representative does not have the will to battle for agriculture.

Cotton would not suffer any market retaliation by the Chinese if a complaint was filed. Cotton is not fungible as are the grain products and thus, the pricing structure and the nature of the world cotton trade is vastly different. Additionally, the Chinese national cotton stockpile must be significantly reduced if the Chinese are to implement their own announced plans. In reality, there would not be any beneficial reasons on behalf of China to retaliate against U.S. cotton. Even if they did, the nature of international trade would simply be to move the pieces of the puzzle around the board. The economic impact would be nil.

Two new releases this week also drew attention. First, the BBC comments we publicized two weeks ago regarding foul smelling bacteria drawn to polyester were picked up by The Wall Street Journal and later by The Huffington Post. These outlets, with their international audiences, focused attention on cotton demand. Yet another release commented that cotton was losing the public relations battle with the consumer, and noted the severe fiber market share lost to manmade fibers and the acid-based chemical fiber.

Certificated stocks have fallen to just above 30,000 bales. This can be viewed as a small feather in the bull’s hat. However, a more prominent feather is the buildup in December call sales (representing futures contracts that must be purchased) against December call purchases (representing futures contracts that will need to be sold). We noted a couple of weeks ago that the typical situation is for the December contract to face a much larger volume of call purchases than call sales. This year, the reverse is true and is very unusual. Thus, the December contract has a considerable underpinning of support.

The trading range will continue, and the mills and trade will strongly defend any attempt to drive December below 65 cents. Nevertheless, the peak harvest season is on our doorstep, and that always brings pressure. As the musical lyrics go, “Hold on to what you got.”

Give a gift of cotton today.

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