Cleveland: Setting the Stage for Higher Cotton Prices
June 11, 2013 Happy days are here again – if you have a stand, or prospects for one. There are a number of reasons that the new crop December New York ICE futures contract has stood firm with its support at the 82 cent line, but the poor start for U.S. cotton across the Belt is one of the primary reasons. We have preached the long term drought facing the giant Southwest, home to over 55 percent of U.S. cotton. We are now entering the early stages of insurance damage to crops in that region. That process will go on for another six months or so, but we now know the crop loss due to drought will be major and substantial.
The flip side of that coin is that the market will continue to hold the 82 cent support and likely spend most of its time between 85 and 90 cents as we move through the growing season. That is, as the economist likes to say, “Other things being equal.” In layman’s terminology that translates to, “Give me a one armed economist.” Yet, given a consistent and slightly growing demand (as is expected) the December contract will spend most of its trading in the 84-85 cent plus trading area.
Again, preaching to the choir, very strong demand surfaces on any move below the 82-83 cent trading area. U.S. export sales for last week, as the market was down almost daily with the nearby July slipping below 80 cents and December falling to the 83 cent area, totaled an unbelievable 322,600 RB of Upland. Sales for the current year were 184,200 RB and 2013/14 sales were 138,400 RB. Pima sales totaled another 1,000 RB.
Vietnam and China were the primary buyers for immediate delivery, while Chinese purchases for 2013/14 accounted for almost 100,000 RB of the purchases for the next marketing season (98,100 RB of the aforementioned 138,400 RB). It was noted that some fourteen countries were buyers of U.S. cotton, a large number given we are at the end of the current cotton marketing year (August 1, 2012 to July 31, 2013). Demand remains widespread as textile mills continue to run very short of cotton and must continue their hand to mouth buying.
Also noted this week as the July contact winds down and is set to go to First Notice Day and then expiration, was the large amount of call sales that have been pushed forward from July and now rest on the December contract. Unfixed Call Sales for December exceed unfixed call purchases nearly two-to-one. This ratio is all but never heard of at this time of year.
Typically, the ratio at this time of year is about two-to-one in the opposite direction, or maybe even three-to-one in the opposite. Thus, merchants have already hedged their grower purchases, cooperatives have done their “typical” timely hedging and yet, mill requirements to fix their price has not been done. This indicates that when mills begin to fix prices for December (in October-early November) there will be little grower hedging available to provide the selling (selling futures) when the mills will be required to buy (buying futures). Thus, the stage is being set for the December contract to move higher. Mills continue to be reluctant to fix prices as well as cover needs for the fourth quarter, as well as the first quarter of 2014. Grower pricing should begin on movement above 86 cents, basis December.
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