Cotton Prices Inch Higher on Yield and Quality Concerns
September 27, 2013 Cotton prices moved higher on the week as weather concerns took center stage, market fundamentals took on a northbound trajectory, and fund managers returned to the cotton ring taking significant long positions.
Upward price momentum for now must depend on the supply side of the price equation, as demand is somewhat fixed in the near term. That is not to say demand is fixed, but rather growth will be slow over the next sixty days.
Crop conditions are deteriorating across the globe with very few exceptions. The troublesome conditions are continuing to have a major impact on both yield and the quality of the crop in the leading producing countries – China, India, Central Asia and the United States. This is somewhat offset by larger crops in Brazil and Australia, but world production is headed lower. Thus, prices have now moved to their highest level since mid-August.
The yield-restricted Texas crop remains the primary problem for the U.S. The Mid-South and Southeastern crops have shown excellent recovery with recent weather, especially in the Mid-South where some Stoneville bolls are bigger than my fist. Nevertheless, moisture coming up from the Gulf is hampering quality both in the Mid-South and the Southeast. Those crops could see increased yields, but the Texas crop will be a bit smaller than expected.
However, the principal yield reductions are coming from both China and India, where flooding has affected yield and grade. India witnessed the highly unusual return of the heavy monsoon rains and associated floods. With much of the crop open, both quality and yield losses have already been reported. There is now a major concern that India will not be able to meet the quality restrictions required for existing sales to China. To a lesser extent – but still representing a major problem – China has also received excessive rains, thus reducing the world’s supply of quality even further.
The market is reflecting the combination of these events as the global supply of available cotton between now and January is shrinking. Therefore, the premium for better grades is increasing and pushing prices higher.
USDA-WSDE has published the logic behind its estimate of the Indian stocks situation, and kudos to USDA for making its methodology available. A number of us have publicly questioned its estimate, suggesting it is several million bales too high. Let me just say that disagreement is the very essence of intelligent thought, and USDA has a long history of respected intelligent thought.
The current quality/yield reductions have the ability to push December back to 90 cents or better. Nevertheless, I remain of the opinion that demand disappears above 90 cents and will limit any price advance.
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