What’s Driving the World Market? Quality. Quality. Quality.
January 17, 2014 You are all familiar with the three main factors regarding the value of real estate – location, location and location. Bulls are thrashing about in the cotton industry, and it is all about the three main factors affecting the current price of cotton – quality, quality and quality.
Longer term, the three main issues are also quality, quality and quality. Just look at what is happening in the world cotton industry.
Led by the demand for quality cotton, prices climbed to a five-month high this week. Rather than being led by New York, the price rally was based on the firmness in Indian prices, as well as an expressed desire by Chinese mills for machine-picked quality cotton. With the U.S. supply running low and strong sales continuing to be made to China, the rally is suggesting price rationing is now occurring.
Granted, I had expressed six weeks ago that the market would likely fail at 85 cents. I did lay out the possibility that the tightness in world quality could push prices to the 88 cent level, but I just did not expect it. Likewise, I do not feel the market is in for clear sailing now, as most likely it will want to test 82 to 83 cents another time or two. Yet, it is clear that demand can push prices higher before the 2013-14 marketing year concludes on August 1.
Nevertheless, I remain firm that the majority of old crop cotton should be priced at this 87- to 88-cent level. This could be the limit for now, as the 88 to 89 cent barrier should be stiff. Yet, I must remember the third most important fact affecting near term prices.
As stated six weeks ago, the market scenario remains bullish for old crop prices, but bearish for new crop prices. Yet the world price has now inched back above 90 cents after falling into the high 80’s. Export sales were impressive this week. And, others in the cotton industry appeared to join the bandwagon of our long-held belief that China will not dump cotton on the world market. It simply would be counterproductive to all their past efforts in supporting the domestic price paid to Chinese growers.
Yet, the demand from China has pulled Indian prices higher and higher the past two months. The entire market dynamics have changed as China’s demand pulled Indian prices up to, and in some instances above, U.S. prices.
Three weeks ago, China was purchasing far more Indian than U.S. cotton, because it was more readily available and much less expensive. Now, U.S. and Indian prices are near equal, and the world is somewhat generally indifferent between the growths. Yet, since the Indian domestic textile industry is on track to surpass Chinese consumption, the domestic price of the Indian crop is also escalating. In fact, India is buying quality cotton from West Africa at a lower price than the same grades of Indian cotton can be purchased in India.
These quality issues are not going away during the current marketing season of March, May and July contracts. There are some down days coming. But for now, the quality supply demand imbalance will pressure old crop higher.
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