China Rules the Cotton Market…Again
August 3, 2020 The 2019-20 cotton marketing year can now be retired to the history books. Six months into the year, we felt like that the news reels would discuss this season in terms of world record consumption, U.S. exports of 17.5 million bales and much stronger U.S. mill consumption. For sure, the U.S. was looking at potentially a record share of the world export market – and even growers were expecting to expand 2020 planted acres.
A funny thing happened on the way…
COVID-19 wreaked havoc on the world cotton industry in particular, but of course on the U.S. and world. Cotton prices fell to 48 cents, but quickly recovered to the mid to upper 50s. Then the June plantings report surprised the industry and set prices back into the 60s.
Yet, since the last week in February, we knew major problems were on the horizon. Our early February forecast of challenging the mid 70-cent level was instantly dashed. Mill consumption collapsed, export sales and shipments slowed and consumer demand – the life blood of healthy cotton prices – disappeared.
Now, as the 2020-21 cotton marketing year begins, the price forecast is hopeful for a 66-67 cent trade, basis the December futures contract. However, we well know that prices have met very stiff resistance on any approach to 65 cents. The market is inundated with near record world stocks and excessively large U.S. stocks. Further, cotton stocks outside of China are also very excessive.
Put another way, the U.S. – the world’s leading exporter of cotton – is facing more competition than it has ever faced. This is a bearish situation that begs futures prices to slip back into the mid to high 50s.
But also along the way…
Mother Nature has worked to lower the U.S. crop. The pre-plant harvest was guessed to be some 19-20 million bales by most in the industry. USDA’s July estimate was 17.5 million bales. Various conditions in the Southwest, Southeast and Mid-South have combined to place the crop between 16 and 17 million bales.
Yet, July was exceedingly great for the areas that had localized moisture. Those crops may have had the best fruit set ever. Moisture has become even more important. Actually, if the current hurricane in the Gulf is reasonably mild, then the associated moisture will be welcomed. Yet, who wants to bet on that?
USDA representatives are currently surveying fields and will report a new estimate in its August 12 world supply demand report. We will release our expectations regarding that report next week. Nevertheless, both U.S. and world production for 2020 are supporting the market, as China is seeing a very mixed bag with crop conditions in southern Xinjiang much improved over conditions in the north. The Indian crop has progressed better than expected and is slighter larger than USDA’s July estimate.
The Phase One trade deal with China has been beneficial for the U.S. Repeating ourselves from last month, China has purchased U.S. cotton over the past four months to the tune of over one billion dollars. As discussed last month, this is cotton China does not need except to enlarge its already 36 million bale stock level. Thus, China has a full year of its cotton consumption needs before 2020 picking even begins.
China has shown itself to be a savvy market participant and has expertly bought U.S. cotton on principal price dips below 62 cents, with its more active buying between 55 and 59 cents. Sales over the past four months exceed 2.4 million bales. For the 2019/20 season, China has purchased 3.7 million bales with 8 more reporting days remaining in the year. As of July 23, some 1.3 million bales of this total were yet to be shipped. Thus, China has switched from a minor U.S. cotton trade partner to one of the top three markets for U.S. cotton.
This week’s export report was the best in two months. For the week ended July 23, net sales were 137,800 bales (upland 127,800/Pima 10,000). Cancelations were 23,500 bales, with none from China. The biggest cancellation was 10,500 bales with Indonesia, which was a big cancellation coming from there. Shipments were 328,600 bales (upland 320,800/Pima 7,800), thus putting shipments within reach of USDA’s U.S. export estimate of 15.2 million bales.
Remember, USDA will use Census data in its final export report. Thus, we can be sure 2019-20 season shipments will exceed USDA’s target of 15.2 million bales.
As stated last week – and as Billy Dunavant and Dr. Willard Sparks often reminded us – some 60-80% percent in the variation of world cotton prices can be traced to China. Thus, the Phase One trade deal can be a blessing to U.S. cotton and other commodities.
Despite U.S. growers having, by far, the best seed genetics in the world, I remain a “small crop” guy this year. Hopefully, I will be wrong. Growers are encouraged to use put options when and if December futures return to the 63-cent level. Expect the market to continue within its 57.50 to 65 cent range.
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