Little Change in Market As Demand for U.S. Cotton Builds

Cotton’s long-established trading ranges continue, but the nearby March 2014 contract suffered triple digit losses on Friday – off 112 points and setting at 77.23 cents.

There was little changed on the week, as U.S. export sales continue at an excellent pace. Somewhat surprisingly, the market continues to await the decisions by the Chinese government regarding the sale, price, year of growth, and cotton quality that will be offered to textile mills.

Rumors are now swirling around the market that a decision will be postponed. This is a clear indication that textile mills are now heavy in the lobbying business to get the government to open more quotas for additional imports – more specifically to be allowed to import cotton without any import duty. With this in the background, the market can expect to hold its support and attempt small rallies back toward the 80-cent level, basis the March contract.

Demand continues very strong at current prices, as U.S. export sales for the week ending November 14 were a net 305,100 RBs of Upland and 26,200 RBs of Pima. Turkey and China continued as the primary buyers of Upland, and a very wide sprinkling of Asian countries were also noticeable in the mix of 20 countries that purchased Upland cotton. Net sales of 13,200 RB were reported for the 2014/15 marketing year.

Actual shipments are on pace with last season, even though export sales are about 900,000 bales below the same level of a year ago. However, 2012-13 exports totaled 13 million bales, whereas USDA’s estimate for 2013-14 exports currently stands at only 10.4 million bales. Thus, it can be said that the pace of this season’s sales are ahead of the pace at the same time a year ago. This bodes well for the U.S. export estimate to be increased as much as 300,000 bales, up to 10.7 million.

Given the Chinese situation and assuming the decision to begin selling from the Reserve comes about, the market bottom has been established. A number of growths, particularly Indian, can now be landed at Chinese mills with full quota penalty paid and still priced below domestic cotton. Some U.S. cotton can, and is, coming in this way. This sets up a situation that is very supportive to the market and offers support for the March contract to move into the low 80s.

As China transitions its production from the lower end eastern zone to the higher quality Xinjiang region, world prices will no longer have to adjust for problems associated with lower quality cotton sitting over the market and acting as an artificial lid on prices. The problem facing the Chinese decision makers is the lower quality production from the eastern region that does not have any demand base in China. The Chinese mills require better quality for their yarn production. Thus, while this cotton sits on the market and appears to be marketable, it is not and only adds to Reserve numbers with no demand in sight.

It also sets up another plus. There is a widespread and ongoing debate as to long-term cotton acreage in the U.S. The fact that China requires and will purchase quality supports the halt in reduction of U.S. planted acres, because the Southeast, Mid-South, Southwest and Western regions of the U.S. can all offer quality.