O.A. Cleveland: Bears Are Staying In The Den
October 16, 2012 The December ICE cotton contract settled last week, only 13 points lower (71.36 cents) amid a second consecutive very bearish USDA monthly supply and demand report.
The October report was expected to reflect a larger U.S. crop, but USDA also increased its estimate of world carryover more than two million bales, up to the all but unbelievable amount of 79.1 million bales. In doing, so the agency increased its estimate of the Chinese crop by 500,000 bales and lowered consumption by 2.0 million bales. Indian production was increased 1 million bales and consumption there was increased 500,000 bales.
Other notable changes were also made in the estimates for Brazil and Turkey. The report can be viewed at http://www.usda.gov/oce/commodity/wasde/latest.pdf Tongue-in-cheek, one almost hates for USDA to forecast cotton consumption any longer. Pretty soon they will have demand down to zero. We have spent some time in the past noting that USDA would have to increase consumption levels in other Asian countries and they did begin that process in the October report. However, I continue to suggest that more upward revisions in the consumption of cotton in those countries must be made. Consumption has not dried up – too many mills report profitable margins at current prices and suggest they are increasing their yarn output.
The immediate response to the bearish report was to take prices 139 points lower by Thursday’s close. However, a 65-point rally on Friday left the market down only 13 points on the week.
Historically, as one looks at the world stocks-to-use ratio – essentially 75 %, the idea of 50-cent cotton or even 40-cent cotton comes to mind. Yet, such is not the case. The cotton world has changed. No longer does China want cheap”cotton to feed its textile industry.
The economic policy of China is to directly put a price floor under cotton and to actually attempt to push prices higher (once the sole providence of the U.S). The policy has been followed to ensure that more than an adequate supply of cotton was available to the country’s mills. Yet, now that China has begun to lose textile market share to other Asian and Subcontinent countries, it has amassed nearly 40% of the world cotton carryover and effectively removed it from the market. Thus, a market that would be expected to reflect very cheap cotton prices has consistently held in the 70’s and 80’s throughout the year.
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