Cleveland: Does the Cotton Market Need the 2020 Crop?
July 20, 2020 Cotton prices eased up to 65 cents and, as feared, backed off and are now dog paddling as December futures attempts to hold the 62-cent level. In fact, the weekly settlement for December – 61.94 cents – reflects a bearish view moving forward.
Despite the potential production disaster developing in the U.S. Southwest, the world supply demand balance sheet continues to reflect that the world effectively has a full year’s usage on hand before the 2020 harvest even begins. That is just an ugly way to suggest that the world doesn’t need the upcoming 2020 crop. Both the world supply demand ratio and the U.S. supply demand ratio scream for lower prices.
A positive view of the U.S. situation, but backhanded, is that the U.S. will need every bale it produces to meet both its domestic consumption and export needs. The negative side of that – and the realistic view – is that the U.S. crop may likely be some 3-4 million bales below an “average” crop. Thus, the current and very burdensome level of carryover stocks.
Speculators have provided all the buying power that moved the market higher the past month. The speculators have been buyers, and the world cotton trade has provided the liquidity needed to satisfy the speculator buying. Too, without the current interest by speculators, the nearby December futures contract would likely be near 57 cents – thus, speculators have added about a nickel to the market price.
Yet, other than these few speculators, the market has been relatively void of trading activity. Daily trading volume is breaking three-and four-year low volume numbers. It’s as if only a very few computers are connected to cotton exchange trading. The low volume is also reflected in both U.S. and other country export numbers.
Export sales have lagged for three months and have even become stagnant except for the occasional purchase by China. Yet, this week, sales to China were dwarfed by actual sales cancellations by China. Certainly, Vietnam and Turkey remain active customers. Yet, only eight countries purchased upland cotton from the U.S. this week. Four of those eight countries purchased less than 1,500 bales each. Too, Turkey bought only 400 bales, and Vietnam, a primary market, came to the U.S. for only 20.5 million bales.
Last week, only nine countries purchased U.S. cotton. Typically, a minimum of at least 15 countries are in the market every week. Typically, a good export sales week would include some 18-20 countries buying U.S. cotton. Actually, this week’s net sales were a negative 17,500 bales. That is, sales cancellations exceeded new sales to the tune of 17,500 bales of upland cotton.
If not clear to all, it has become very clear from the export sales data that the demand for U.S. cotton is facing the most difficult marketplace it has in memory. Other countries have excess stocks and do not have warehouses for storage. They depend on outside storage. This means they have to sell/export their production at any price – and that price is low.
The coronavirus difficulty for the cotton world was further noted in the export sales report that El Salvador cancelled a 4,000-bale purchase. Granted, that is not a big number, except it represented a big cancellation for that country. The cancellation reflected the continued slowdown in mill activity there. Granted, El Salvador did purchase 4,000 for the next marketing year in hopes that its textile mill business will rebound.
U.S. cotton growers were very active in pricing new crop cotton this past week and taking advantage of the 62-64 cent level of New York futures. While this offered, at best, a break even price to growers, MLP payments, along with the seed cotton program, will hopefully allow growers to net a break even price.
Continue to look to any movement near 65 cents, basis December futures, to consider using put options. As noted last week, Mother Nature must take the U.S. and world crops lower if prices are to hold the 65-cent area. Demand fundamentals do not demonstrate any desire for higher prices.
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