Mad cow disease. Driven by mill on-call fixations, cotton prices shot more than five cents higher at week’s end, locking limit up.
Likely, the price surge is not done yet, as going into the week, mills needed to fix the price of some 4.5 million bales on the July contract – a record high. No longer can fixations be rolled forward. They must be fixed on the July contract, and that can only be accomplished by buying July futures.
Noteworthy, too, was that USDA increased its 2016-17 estimate of U.S. exports 500,000 bales to 14.5 million bales. Additionally, USDA lowered both U.S. and world carryover stocks for 2016-17 year.
It’s crunch time for mills, as first notice day for the July contract is June 26, just six weeks away. Mills are truly being squeezed, very tight (as my father would say, “tighter than Dick’s hat band”). As noted last week, the May contract eased above 80 cents, and we noted that where May went, then July was sure to follow.
Mill demand remains strong, but is weakening due to price rationing. Granted, those very, very few growers that have cotton to fix are pleased to see July challenging 83 cents. However, such a lofty price is damaging to the long term health of demand building, as it places cotton in more of the specialty fiber category by creating incentives for mills to continue their switch to the Chinese-produced polluting polyester fiber. Yet, that is a matter of consumer choice and corporate disdain for the environment.
The May supply demand report had been somewhat faded by traders and did not have any surprises. Higher U.S. exports were expected, as was the smaller carryover estimate of 3.2 million bales. World production for the 2016-17 year was estimated to be 106 million bales, with world consumption at 113 million. World carryover was lowered to 90 million bales.
In its first release of estimates for the 2017-18 marketing season, USDA estimated U.S. production at 19.2 million bales, domestic consumption at 3.4 million, exports at 14.0 million and carryover at 5.0 million bales.
World carryover was expected to drop for the third consecutive year, falling to 87 million bales – nearly three million below the current annual carryover. World production, responding to higher prices, was forecast to climb to 113 million bales, as all major producing countries were projected to have larger crops. World demand was forecast to rise to 116 million bales, an indication of expected lower and more competitive prices for cotton.
Stocks outside of China are expected to increase for the second consecutive year and is the basis for the lowering of U.S. exports. However, Chinese stocks were forecast to continue to fall due to the very successful Chinese policy of selling national reserve stocks, coupled with their policy of limiting the government purchase of new stocks. Nevertheless, the increased world production does not bode well for the international price prospects facing the 2017 crop.
Growers that have postponed any pricing of the 2017 crop are encouraged to do so on any movement back above 74 cents, and are cautioned that any move could be short lived and tied entirely to the process of fixations of old crop July on-call sales. Marketing savvy growers should give attention to selling 5-10 cents out of the money March calls, collecting the premium and applying that to the purchase of December puts as close to the money as desired.
While December futures can ride slightly higher on the strength of on-call sales, the risk of December trading down to the upper 50’s to low 60’s is very high.
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