In tune with the icy conditions in much of the Cotton Belt the last two weeks, cotton prices have slid back and forth, as well as sideways. Yet, unlike the highways, the price charts are void of any drastic activity.
The trading channel remains intact, and the nearby May ICE contract is some two cents above its major support level of 62 cents. The new crop December continues to trade a two cent range around 65 cents. The May and July contracts – absent any new speculative money – will hold the current range, while the basis for cash cotton should improve.
Historically, the month of March has a few poor trading days. The current season is expected to follow suit. Speculative longs are not taking their money out of the market. They simply are resting on their current positions. Longer term, the December contract projects higher, but we must now wait on the USDA March 30 plantings intention report for direction.
Bearish news continues to come from the massive excess of world stocks. China holds some 60 percent of the stocks, while all other countries hold the remaining 40 percent. Yet, the primary exporting countries hold just above 15 percent of the total world stocks. More importantly, the countries that hold stocks of high quality cotton – that cotton for which exists the greatest demand – have only some 13 million bales, or only 10 to 11 percent of the world’s cotton. Thus, while world stocks appear burdensome, the picture is considerably skewed.
Bears also point to a decline in Chinese consumption. Their data is correct, but the reality is likely more bullish than bearish. Chinese mills continue to move manufacturing to Vietnam, Cambodia, Laos and Miramar. This relocation, based primarily on wages rates, will continue. Increased consumption in those countries, as well as Indonesia and all of Southeast Asia, is offsetting the drop in Chinese spinning.
Additionally, Chinese yarn imports continue to rapidly expand. Thus, consumption should be viewed as short term supportive and long term bullish for cotton. Demand is at the cusp of a significant expansion. Too, the demand for U.S. cotton will remain exceptionally strong and will return to the 17 to 18 million bale annual level.
With field work very much ongoing across the Cotton Belt, growers appear to be sticking to earlier plans to increase soybean and grain sorghum plantings at the expense of cotton and corn plantings. However, growers now committed to seed varieties that essentially guarantee a three bale per acre-plus yield, as well as premium quality traits, will find cotton to be competitive with any crop. Yet, the reduction in cotton acreage in the U.S. and globally will be very supportive to the market.
However, soybean demand is also very strong, but the production/consumption imbalance in oilseeds will shift in favor of cotton in 2016-17. This will be important to cotton, as it will correspond to the time of the release of significant pent-up demand for cotton.
Gross weekly export sales of Upland cotton – at some 80,000 bales – were met with about 120,000 bales in cancellations from China and 142,200 bales in total. Thus, net Upland export sales encountered its second negative sales week over the past month. The Chinese cancelations were not without warning. Nevertheless, they were a drag on the market’s price performance.
While cotton growers are itching to plant more acreage, the market’s signal is to hold off this season. The market signal is correct. But, that signal will soon change, and plantings will increase in the following season. Nevertheless, the December 2015 contract will push the 70 cent level before all is said and done.