Believe It! Cotton Fundamentals Point to 95 Cents.
The 1981 hit “Don’t Stop Believin’” had to be penned for cotton growers.
Now is the time. Cotton demand is at an historic high, world supplies are headed lower for the fourth consecutive year, high grade supplies are limited, and the consumer has finally realized that the use of polyester and other test tube fibers come at a non-sustainable cost to the environment while depriving them the comfort and feel of Mother Nature’s natural fibers.
Don’t stop believin’ is a centerpiece of cotton’s trek to higher prices and its challenge of 90 cents and then 95 cents. I tweeted earlier in the week, December has 95 cents written all over it. Some think it will go higher, and I can easily build a case for them. Growers should not be ashamed to price at 90 cents even if the market moves to 100 cents (using the word dollar is a demand killer). After all, they will still have a few bales, as much as 25% of their crop, to sell at higher levels.
However, I get concerned with prices at 95 cents and above. Certainly growers want them as high as possible. Yet, demand begins to weaken, and other fibers take market share from cotton in the 95 cent area. As if I could, I would limit the market at 95 cents – no higher – and work to keep it at that level for another growing season and then another.
Of course, the market does not look that far ahead, so it rations supply as it sees fit. In doing so, this year may be the year prices scare the 100 cent level again.
Well, I can’t say all is good news. Fundamental analysis – the ole supply and demand equation – always determines price. Fundamentals are rock solid, or a “lead pipe cinch,” in favor of higher prices. Technical analysis – the road map to the ultimate price – is, as we all know, very important and points to higher prices at present. Typically when both fundamentals and technicals are aligned, then one can make the big bank deposit.
Yet, from time to time, the market bogs down due to another stick stirring the pot. We are seeing some of that now. It’s psychological analysis.
While the cotton market should be immune from any China-U.S. trade dispute as it will not impact any of the supply/demand factors in the market, the speculator/fund manager “Nervous Nellie” types confound the market fundamentals, lead the market astray, and disrupt the natural supply/demand price impacts. The tariff talk and the reality of actual tariffs have the market askew for now.
The selloff on the week’s last trading day came about due to the discussion that the U.S. would include all of the products exported to the U.S. by China in the tariff. That’s a tariff on $500 billion worth of goods imported from China over and above what the U.S. exports to China. I have never seen $500 billion, so that is too big for me to really understand. Thus, the “Nervous Nellies,” lacking any understanding of world and U.S. cotton fundamentals, keep the market on its heels as it eases higher and higher.
With respect to fundamentals, the world and U.S. cotton industry is immune and totally bulletproof from tariffs.
Yet, market psychology is making its impact evident in the market and will in the very short run. It’s a battle the U.S. will win if, and only if, the U.S. consumer, grower and speculator have the resolve to protect their markets, demand and consumption. The quick phrase for that is “fair trade” as opposed to “free trade.” The cotton industry has long spoken for and pushed for fair trade.
All economists are taught at birth (or rather have drilled in their heads) that everyone wins in free trade. I learned that, know that and believe that. However, the problem is that the assumptions that lead to that truism are based on another economists’ phrase and assumption – “perfect competition.” That is the backbone of economic theory. We also know that such does not exist and is only a jumping-off place. It is the “perfect cow” on which the real world is measured and truly does not exist.
Thus surfaces the phrase fair trade. It’s that ole rule our parents taught us – treat others like you want to be treated. In other words, keep the emotion out, just play fair.
Certainly the Chinese – as good, eloquent, bright and smart as anyone can be – have thrown emotion into their action, because they have been treated fairly in all their WTO actions and now do not want to open their markets to others. They want to renege on their solemn promise to play fair. They want protection, but do not want anyone else to have protection. They want, want, want – no giving, just be given to. They want to be treated as a special case, despite the fact that they agreed to open their market to cotton and have failed to move forward.
Thus, the U.S. tariff is simply saying it is time to have a level playing field.
A final note on that issue. Let’s see, the Chinese support price for the cotton grower is about 134 cents, or $1.34. The U.S. support price is about 60 cents. For those thinking it is 52 cents, one must delve deeply into the USDA/CCC cotton loan table.
That’s a ratio of more than 2 to 1. Free trade or fair trade?
December has 95 cents written all over it.
Give a gift of cotton today.