Brazil Knocking on the U.S. Cotton Market Share Door
October 16, 2023 This week’s mildly bullish USDA supply demand report supported higher prices in Friday trading (Oct. 13) and elevated the week’s settlement to 86.06 cents. The report continued to reflect poor world demand for cotton but, like the past three months, showed a further decline in U.S. cotton production.
World production was increased slightly based on an 800,000-bale increase of the Brazilian crop, but also reflected a decrease in the high-quality Australian crop.
The New York ICE December contract, while off slightly on the week, did close on an uptick.
Liquidation of the December contract has begun. After posting 15 days of increasing open interest, contract liquidation has begun. Too, early in the week, the market dipped on profit taking, as the contract faces first notice day on Nov. 24. The increase in certificated stocks will keep the contract on the defensive, and the 83/84-to-88/90-cent trading range will continue to dominate. Certificated stocks will continue to increase, as the Board is the best market for U.S. cotton.
USDA increased world production 200,000 bales, decreased world consumption less than 100,000 bales, but decreased world carryover by some 10 million bales by adjusting its Brazilian data base over a 20+ year period. Prior to that adjustment, Brazilian stocks had risen to a level of some 15 million bales – far more than market estimates. The result was to decrease Brazilian and world carryover some 10 million bales. Brazilian carryover was estimated at 5 million bales and world carryover at 80 million.
The report also showed a decrease in U.S. production down to 12.8 million bales and lowered U.S. carryover to 2.8 million bales. The final U.S. crop may well be even 200,000 bales lower.
The data reflects an alarming change in the historical structure of the world cotton trade as Brazil is now the world’s third largest producer, replacing the U.S. in that position. More importantly, it now places Brazil’s share of the export market essentially equal to that of the U.S. The U.S. dominance in the export market heretofore has never been challenged, but now Brazil is at the historical doorstep. The U.S. has suffered two consecutive weather-beaten crops, thus allowing competitors to take significant world trade share from the U.S.
Supporting that report was the U.S. export sales report for the week ending Oct. 5 that indicated net export sales of only 43,400 bales of upland with shipment of only 104,000 bales. Only nine countries purchased U.S. cotton on the week, as other countries – notably Brazil and Australia – sold cotton much more effectively in the market compared to the U.S.
A significant problem facing the U.S. cotton industry is the favor that mills are becoming very familiar with spinning non-U.S. cotton and discovering that it may be more price competitive for their respective operations. Merchandisers report that while cotton movement is slow, they can sell more non-U.S. cotton than U.S. cotton. The U.S. has lost its promotional superiority. Some will claim that is caused by the weather-reduced crop.
Growers are cautioned that the slow movement of the U.S. crop has set up the reality that a significant volume of carryover stocks will move to the loan program. Too, if history is a judge, U.S. growers will keep cotton in storage, pay storage costs, and hope for a higher price later in the year. This scenario is set up to be a significant financial trap this year due to the anemic demand and the decline in U.S. market share.
We have commented over the past several weeks that growers should be prepared to sell their crop at harvest and buy call options. This strategy will avoid storage costs. It is a market fact that someone – some entity, some firm, some company – will pay for storage. Hopefully, the grower, by his own actions, will pass that cost to the merchandising industry this year.
Still, I feel more comfortable with breaking 90 cents than falling below 83 cents. Either will be very difficult. Growers are encouraged to price at 87.50 and above. The support at 84 cents remains very, very strong.
Do not pay storage. Give a gift of cotton today.
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