Cotton prices ended the week mildly on the defensive, but holding well above 72 cents, basis the December contract.
Market comments continue to be dominated by the fundamental strength brought on by the July USDA supply demand report. While few reject the USDA analysis, there are a few scenarios that can yet move the market depending how events play out. However, the current trading range is expected to be a rather wide 20 cent range between 65 and 85 cents. Yet, a more realistic range can be tightened to the 12 cent 68-80 range.
This early in the crop production year, Mother Nature will still have the major say with respect to the price equation. As the year progresses, the impact of demand will be enhanced.
The July 22 New York Stock Exchange Cotton Round Table discussion, sponsored by ICE, produced the 65-85 cent trading range. The participants addressed the USDA report that emphasized:
- The 2016 world production deficit,
- The potential increase in U.S. cotton exports,
- The declining, but still large, Chinese stocks situation, and
- The potential for a 15.8 million bale U.S. crop.
The 2016 world crop, estimated at 103 million bales, is 5.0 million more than 2015 production. But smaller production in China and the potential for only a limited increase in India will keep working to lower world stocks.
World area planted to cotton represents the lowest acreage since 1986 and 1975, respectively. It is noted that world yields fell 5.1% and 5.5%, respectively, in those crop years. While yields are not expected to fall that much in 2016, it is noted that if world yields were to fall 5%, then world production would drop to only 82 million bales. As stated, this is not expected. But given the Chinese and Indian weather problems, it must loom as a possibility.
Additionally, it is noted that Chinese acreage is expected to be the smallest since 1960 – over a half century ago.
This sets the stage for improved U.S. exports during a period when the U.S. would otherwise face a very large build-up in its domestic carryover. Additionally, the larger U.S. production makes it feasible for the U.S. to continue to supply cotton to both Brazil and India because of their 2015 production woes. Too, without weather-reduced crops in those two countries, the U.S. would be hard pressed to sell the forecasted 11.5 million bales during the coming season.
Chinese reserve stocks continue to sell at the pace of some 130,000 bales daily, and total sales since the first week in May have climbed to nearly 7.0 million bales. It appears that Chinese stocks could fall nearly 9.0 million bales on the year alone. This will still leave a very large carryover in China. However, the world balance sheet could quickly move to a world carryover shortage scenario, given the 12 million bale production-consumption deficit last year and now the potential 9.0 million bale gap this year. Could it be that the world’s excess supply situation is well on its way to being resolved? One more year, maybe?
The potential for a big U.S. crop exists today, but Mother Nature needs to begin almost immediately blessing the Texas crop with timely rains. The subsoil moisture is excellent. But without rain immediately, the crop will begin to suffer and could be a near disaster in less than a month. Thus, the next three weeks will have much to say with respect to prices. Granted, it is still early, but the Texas moisture shortage has become that critical.
Growers are advised to price as much as one third of their crop at the 72-75 cent level, basis December. Like it or not, prices are now sitting on the midpoint of the normal “high” price range for cotton. Prudent marketing calls for some pricing. The market has returned to a level such that puts can be purchased, but beware of the volatility premium. If puts are not used, then growers are encouraged to fix the price on that one third of the crop.
This market can have some long legs without West Texas receiving immediate moisture.
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