Market Set for Shift to March Contract
November 21, 2016 Cotton prices sailed higher this past week as the promised squeeze on the December contract came rushing in.
December closed the week up 496 points, with March being 329 points higher – a clear indication that cotton is expected to be more valuable in the short term than in the future. Cotton traded to a high of 73.62 cents on November 18 and settled the week at 73.40.
With first notice day (FND) on the December contract on November 23, shorts must act quickly to offset their position by bidding higher or by standing to accept delivery. Some deliveries are anticipated, but most shorts are expected to be forced to buy their way out by bidding futures prices higher. Delivery notices will go out the afternoon of November 22, just after daily trading has ended. Thus, the squeeze is nearly over.
Grower prices will then be based on the March contract, as December will be its expiry period. The market is expected to rally higher early in the week as shorts buy their way out. This squeeze will not be too painful for most. However, there will be a few bandages on the floor.
Additionally, it is expected that the March contract will begin to move back down to challenge the lower end of the trading range before attempting to rally again. The Monday/Tuesday trading could rally to the 74-76 cent range, but any such move will be very short lived. Yet, the lower end of the trading range – 66.50 to 67.50 – has proven to be particularly supportive on all price pullbacks since early spring and remains as very significant price support.
I have been a proponent of lower prices, but must admit that the 67-cent price support level has been more than very impressive. Thus, until broken, I must advocate a trading range from 67.50 to 75.50 cents, basis the March contact.
Mills continue to scramble to obtain cotton, but are in fact now finding adequate supplies of high to very high grades. West Texas is enjoying its highest grade crop on record. The genetics introduced some 20 years ago in that region have proven to be a highly successful seed for growers. Yields have been recorded, on a limited number of fields, as high as 7+ bales per acre. Too, some Mid-South growers have enjoyed the benefits of a 4 bale per acre crop.
Yet, until the current year’s harvest, high grades have been limited around the world. Mills are now finding an abundance of high grades in the U.S., Australia and Brazil. Nevertheless, until the pipeline is full of high quality cotton supplies, mills will continue to scramble as they are now for the quality they want.
Prices to the grower are some 5 to 10 cents higher than a year ago when demand was somewhat muted. Thus, merchants have been scrambling to find cotton for export. Growers have held tight and avoided offers below 70 cents, and have proven to be artful to accepting offers above 70 cents. This has allowed world exports to expand and bodes well for an increasing demand for cotton.
However, that increase is very limited. Mills tend to switch from cotton to other fibers as futures move above 70 cents, and many growers are beginning to expect 75 to 80 cents for their production. The demand will simply not support such a price. While demand is stronger than a year ago when prices were somewhat muted, the expectation of further growth is being met head on by the very large infrastructure investment designed for the spinning of Chinese manufactured fibers – the so-called petroleum acid-based polyester.
Importers and retailers are daily dropping off the cotton list, or at best significantly reducing their use of cotton fiber. They are looking strictly at margins and see that their respective income soars when they can buy the cheap, subsidized Chinese petroleum acid product instead of cotton.
Add a new retailer to the already bloated list. Land’s End – once a stalwart user of cotton – is shifting to the Chinese manufactured chemical fiber. Yet another firm has brought forth a chemical fiber flannel shirt as a replacement for the traditional cotton flannel shirt, and is out to take that significant men’s market.
It is that permanent loss of market share that is blocking any real attempt to push prices higher. Simply look at export sales this season. The export sale spigot is all but cut off as cotton prices move above 70 cents.
Yet, there is one bright macroeconomic factor at work for cotton. Both U.S. and Chinese speculative funds have returned to commodity markets with the change in U.S. political direction. Speculative funds are of the belief that U.S. economic policies will be friendly to the demand of commodity usage, both industrial and agricultural. As such, the all-important long fund sector has come back to the cotton ring and is counting on a limited amount of built-in inflation to push prices higher. The return of the funds is very impressive, in that the value of the U.S. dollar made a 13-year high this past week.
The long established trading range will continue – 67 to 75.50 cents.
Give a gift of cotton today.
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