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Will the U.S. Sell Out of Cotton?

It was a refreshing week for cotton growers.

The market was up all week, with the exception of Friday’s 21 point drop, settling at 59.36, basis March – but 300 points above the 56.60 low tested last week. Exceptional export interest was noted for both Upland and Pima, as prices traded below the 58 and 59 cent mark. Too, on Thursday, USDA reported another market year record for weekly export sales – the third consecutive record sale week.

The backdrop behind this has been the rapidly increasing open interest as prices moved lower, generally indicating a very bearish market and the lifeline for the 50 cent bears. Yet, it is February now and First Notice Day for the March contract (February 23) is rapidly approaching, leaving just 15 trading days for the managed funds, including the rapidly expanding Chinese funds, to clear out their short positions.

Export sales totaled a net of 582,900 bales for the week ending January 22. These sales were comprised of 546,200 bales of Upland, 13,100 bales of Pima and 12,600 bales of Upland for the 2015-16 marketing year. This was the second largest weekly on record. Again, China was the primary buyer taking 177,700 bales of Upland, followed by Vietnam with 174,800; Indonesia with 96,500; Turkey with 35,300; and Mexico with 17,800 bales.

Too, I note the total annual purchases to date, a level of that – while not exceeding the WTO minimum – is on the brink of doing so. Most are viewing this as a de facto statement by the Chinese that they will continue to import from the U.S. In fact, it is more evidence that China is using their 2015 TRQ Quota to import machine-harvested high-grades.

I have maintained for the past two years that the Chinese would have to keep the import doors open, because they need high quality cotton (unavailable in China and generally only available in the U.S., Australia and Brazil) to mix with domestic cotton to produce an acceptable yarn. In fact, China has purchased 2,102,088 bales of Upland. Again, as has been previously warned, USDA will have to increase its import level for China and its consumption for China, Vietnam and Indonesia, Vietnam has now purchased nearly1.2 million bales from the U.S. Indonesia has already purchased more than 813,000 bales.

World consumption is increasing. In fact, the market is now suggesting that the U.S. will “sell out” this year if prices do not increase. We all know the market never sells out. Price rises high enough to ration the available supply.

U.S. export sales and shipments have now reached 9.5 million RB, or 95 percent of the USDA export estimate and the marketing year. And, literally, the year is not even half way complete, as 27 more weeks remain in the marketing year. Sales and shipments to date are 500,000 bales above the same time a year ago. Too, it means the U.S. only needs to sell 60,250 bales a week to reach the USDA estimate. Again, there are still 27 more weeks left in the year.

Total weekly shipments included 274,800 RB of Upland and 8,600 RB of Pima, reflecting the largest volume of shipments of the 2014/15 season. Shipments should begin to expand now that there is a verbal agreement between the longshoremen and the Pacific Docks. The work slowdown has been a needle in the side of the cotton industry, but all seems fine as we await the signed agreement.

Last week, I called on USDA to increase its estimate of U.S. exports by 200,000 bales. As good as they are, they are most likely laughing at me now. It seems they may need to up the estimate a half a million bales or more. Should prices not ration the available crop, then we might sell another million bales. But there is a little pie in the sky there. The point I am making, however, is that every mill in the world will buy cotton on a weekly basis at 60 cents, basis March futures.

As far as market movement, some five million bales of shorts will have to deliver or buy their way out of the market in some 15 trading days. Certificated stocks are less than 60,000 bales.  Counting what must be held off the market by U.S. coops and merchants for April to November domestic mill demand and export commitments, there are well less than five million bales available. Thus, someone will have to pay up, or we will experience the return of 150-200 cent cotton.

It is not going to happen. For the record, it is a lead pipe cinch that it will not occur. I would learn an Irish jig for 70 cents.

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