Cleveland: Low Demand Maintains Status Quo
December 21, 2015 The song lyrics continue to ring in my head, “I might as well face it, I’m addicted to love.”
So, face it I must. My love for the cotton market has shielded me from the realization that as the demand for cotton dwindles, prices will remain in pits – absolutely stuck in the mud.
As commented by a USDA official earlier this month, without fail – month after month – cotton has continued to lose market share to all other fibers. And, regardless of the millions of bales of lower stocks, cotton prices are unable to respond. The loss in market share has simply stripped demand from the market, thus rendering the smaller production meaningless to the price equation.
Some eight months ago, I suggested that the market was facing a 6 to 10 million bale drop in carryover this year. That was enough to put a bit of pep in my step and call for higher prices, suggesting that 62 cents was a nickel to a dime too low for cotton prices.
Most thought I was addicted to something else to expect higher prices.
By the time history concludes the 2015-16 marketing season, ending stocks will be down 10 million bales from the 2014-15 season. Prices, however, are essentially unchanged. On several occasions, we have seen the market a nickel higher and have traded above 68 cents. Yet, each and every time, the market has failed to hold the price rally and came tumbling back to the 62 cent area.
So here we are again. Of course, the top end of the wider range is going stale.
The list goes on – world supply demand reports appear bullish, or at the very least positive; market rallies show initial signs of moving further up the ladder; exports blossom one week; demand is uncovered near the new lows. But the results always come back the same – failed rallies.
Granted, the strength of the U.S. dollar has been nothing short of relentless. Not only has the 12-year downtrend been broken, it has been shattered. Thus, cotton exports have been much more expensive in terms of local currencies to the respective buyers. Thus, export sales are under pressure.
But, one part of me clearly indicates that the U.S. holds a large share of the high quality cotton stocks, and the world must pay up to get them. Premiums by way of a very strong basis are evident for high quality stocks, but the traditional strict low middling 1-1/16 inch (41-4-34) cotton moves at a discount. True, the market does in fact discount the old standard and requires a minimum 31-3-35 as a standard.
However, what the international cotton market really wants is a machine-picked middling 1-1/8 inch (3-31-36). That cotton is selling. Unfortunately, the Southeast (and parts of the Southwest) suffered quality losses due to weather and left the U.S. with an abnormal amount of spotted and/or trash contaminated cotton. The world market places little utility on the cotton. But at a price little different than a “gift,” it will move.
The weekly LDP, now at 4.41 cents, adds incentive to a grower to move his cotton in the cash market and purchase the July three cent out-of-the-money call option, while selling the three or even two cent out-of-the-money put option. Yet, growers must also recognize the speculative nature of the option trade.
The market is left to continue in its 62 to 65 cent trading range as it looks to uncover some demand. It should be remembered that mills are poorly covered for the first quarter of 2016 and totally uncovered for the second quarter on out. Any surge in demand will give a very strong boost to prices, but that boost has been absent all year and is not showing any evidence of surfacing.
The cotton trade has been very vigorous in defending anything near the 62-cent area support level, and this should continue to be a rock solid price floor.
With Christmas and a New Year upon us, as is traditional, we will join you again after the annual Beltwide Conferences.
Merry Christmas, Happy Holidays, and Happy New Year!
Give a gift of cotton this season.
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