Mills, Speculators and Weather Driving Cotton Prices
June 7, 2016 By Dr. O.A. Cleveland
World cotton prices surged higher at the end of the prior week and in Monday’s (June 6) trading, as mills began to come to grips with rising prices and increased price fixations, which only added to the buying that was coming from the hedge fund long speculation.
Long-only hedge funds have been very active in agricultural funds for several weeks and have heaped more cash in not only cotton, but across the board in grains and oilseeds. The “new” fund money was first noticed in the soybean pits three weeks ago, and, with the decline in the value of the dollar, funds have continued their equity market liquidation and moved more money to futures markets.
Supported by more bullish fundamentals and an increasingly bullish technical picture, cotton prices are attempting to break above the 18-month 61-69 cent steel cage trading range. The cage has not been smashed just yet, but Mother Nature is causing havoc with supply demand balance sheets for most of the agricultural commodities and helping drive new money into cotton and other commodity-based assets.
Too, this has occurred at the same time that Washington realized its failure to provide the same safety net for cotton as it had for grains and oilseeds, thus beginning to create an imbalance in agricultural price ratios.
Mother Nature’s current coughing and sneezing spells have the potential to rush prices higher, but don’t base too much of your marketing plan on what She might do.
Before we pop the corks, let’s remember that December sits at 65 cents. The steel cage trading range is still in play, but there are fundamental reasons to initially question the “big crop” expectations of 2016. There is nothing wrong with pricing some 2016 crop cotton at 65 cents, basis December, especially now that the Secretary of Agriculture has now authorized assistance in moving cotton to marketplace, thanks to the efforts of both the National Cotton Council and the Farm Bureau.
For a full overview of the ginning assistance program contact your FAS office, the Farm Bureau or the National Cotton Council.
Agricultural commodities, as an asset class, have surfaced as the darling of the funds, as commodities have recently begun to outperform all other investment classes. The important Bloomberg Commodity Index as of week’s end was up 12 percent for 2016. This is the best performing asset of the year and is off to its best start in eight years. That goes back to 2008 – a time period of significant upheaval in the U.S. and world investment markets.
This surge in commodities compares to an increase of 6+% in bonds and just 2+% in equities. Cotton was one of only two crops that had shown year-to-date losses for the trading sector, but the current turn around has erased the losses and the registers are still ringing. This rush to the commodity market has occurred just as the Brazilian cotton situation has come under more severe strain from Mother Nature. First, there was the drought-plagued Bahia crop and, now, soaking rains just as other regions get set for harvest.
Crop progress in the U.S. is now lagging, most notably because the two largest producing states – Texas and North Carolina – have fallen behind. Planting progress in North Carolina is 10% behind the five-year average (86% vs 96%), and Texas is some 13% behind the same five-year average (65% vs 78%). While there are major delays in other locations, the acreage involved is small compared to total U.S. plantings.
Nevertheless, total U.S. plantings are some nine percentage points behind the five-year average (75% vs 84%). The Texas High Plains and Rolling Plains are rapidly catching up, but have now bumped up against crop insurance deadlines. North Carolina has been too wet and will get wetter this week. Of course, some areas of the Southeast will welcome this week’s tropical storm moisture. But not the Carolinas.
Indian prices set yearly seasonal highs over the weekend, and there is little reason to expect anything but more upward pressure on those prices. The Chinese Reserve has sold more than 3.1 million bales during the last four weeks – a level that few expected. In that regard, the sales are progressing at such a high rate, the Reserve cannot keep up with the delivery schedule it promised. Nevertheless, sales continue strong, even though only domestic cotton was offered last week. The government continues to purchase U.S., Australian and other imports to insure the Reserve’s quality needs in distant months.
Too, mills are now realizing that the Bahia Brazilian crop is both yield reduced and marked by short fiber content, and they are beginning to scramble for cotton. The Chinese crop has been weather reduced due to its poor start, and some cotton acreage had to be planted to alternative crops. The Indian monsoon is now showing its promise, but some acreage has been lost to bean crops.
Topping it off, U.S. exports continue strong – much better than many had expected, as both sales and shipments have surged higher. Net sales reported by USDA last week were in excess of 210,000 RB for both years and including Pima and upland. Shipments exceeded 251,000 RB. The immediate demand by textile mills is insuring much higher last season shipments than in past years.
Oh…and don’t forget my sermon. If you like the price enough to plant some cotton, then like the price enough to sell some.
Give a gift of cotton today.
GET THE NEWSLETTER TODAY!
