How High Can This Cotton Market Go?
August 16, 2013 Ah, the cotton market! Here she goes again, spiraling onward and upward toward the sun.
Of course, history shows that I was one that had expected the price advancement to fail at the 89-to-90 cent mark. Yet, I did offer that if it broke 90 cents, the next objective was 95 cents. With the market sitting above 93 cents, the ICE New York December 2013 contract does have 95 cents written all over it. While I did not expect such, we had laid out the scenario that would allow the market climb to the current level and possibly higher.
Do not think that prices cannot go higher, because they can! How? Here’s the laundry list: continuation of the West Texas drought; continued production problems in China (especially East China); continued moisture problems in the Southeast U.S.; and continued moisture problems in the U.S. Mid-South.
It was the possibility that this set of factors could come together that kept the market battering away at the 89-cent door. It was the fruition of the occurrence of all these factors that pushed prices higher, as the market realized that U.S. stocks would fall below 3.0 million bales and may even fall to some 2.3-to-2.5 million bales (the current USDA estimate for 2013-14 ending stocks is 2.8 million bales). Should U.S. stocks continue to fall below the current USDA estimate, the futures contract will trade closer to one dollar.
REAL WORLD NUMBER 1. In the short term, forget that export sales have turned lower with the move into the 90’s. The shrinking U.S. crop is one of the major causes of the price advancement. That means with less cotton being produced, there will be less cotton to export anyway. In that regard, mills are not backing away from cotton. Rather, mills cannot obtain the volume of cotton they need.
REAL WORLD NUMBER 2. The other scenario facing the world cotton market is the well-known China situation. Record volumes of cotton are in storage, but are locked up without any key available to the warehouse. China holds some 60.0 million bales in its Strategic Reserve, and most of that is not available to the market. With respect to supply availability to the Chinese mills or the world export market, that cotton does not exist. Additionally, China is set to produce another crop that, along with raw cotton imports and cotton yarn imports, will exceed the level of cotton demanded by Chinese mills. The net effect will likely further increase the supply of stocks held by the Chinese government – and isolated from the market.
The unknown as to what China will eventually do with this cotton does hang over the market. But we have discovered that prices can climb to a dollar (well, almost) in spite of that overhang. Nevertheless, China must move that Reserve cotton to market at some time. This will likely be done primarily by attrition, as production in China is gradually lowered over a number of years and cotton production shifts from the east and northeast to the great northwest region of China. Such a project will take time, but will also continue to be a background bullish factor in the cotton market – i.e., a governmental directive to reduce cotton plantings.
These two real world conditions will continue to exist – and must coexist with each other – most likely for a few more seasons. The net effect is positive for grower prices received. The saying that big crops get bigger and small crops get smaller can be accurately challenged.
Yet, the 2013 crop, small as it is, is getting smaller. And as it gets smaller, the New York futures contract will feel upward pressure.
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