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Demand Helps Make Cotton Bulletproof to Tariffs

Demand Helps Make Cotton Bulletproof to Tariffs

Wow, it is already August and time for the market’s lazy, lethargic dog days of trading. Yet, with 90 cents on the horizon, that is the furthest thing from trader’s minds. Let’s hurry up and get to the August USDA crop report so the market can find its breakout above the 90 cents trading cap.

At least that is what traders are hoping for.

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Price volatility has become common place in the cotton market, as prices continue to swerve through triple digit trading most every day. Until the recent week’s end, the market was seeing higher highs and higher lows – the very definition of an uptrend. Yet, the near triple digit selloff on August 3 took much of the week’s gain out of the market. The market did manage to end the week above 88 cents. Thus, it remains well within striking distance of the psychologically significant 90 cent level.

My thought: It will get there.

Tariff talk remains part of the background, misguided as it is relative to cotton. One misguided Bloomberg article suggested the U.S. would lose denim sales. Don’t buy into that. What they were really picking up was the minimum wage increase in California, where a decent number of very small cut-and-sew operations are piecing jeans together. The article was cast as a denim market share loss, when, in reality, they were picking up the increase in manufacturing cost of production due to an increase in the minimum wages paid in California sweat shops.

Immigrants, mostly illegal, have priced their labor at a very low wage rate, and textile sweat shops – not unlike those of decades past – have sprung up, and a sub-industry of cut-and-sew plants have blossomed. Bloomberg mistakenly took the increasing wage issue and turned it into a tariff issue.

Denim demand remains a rock solid pillow of the rally in U.S. cotton prices, and prices are higher even since the tariff talk became fashionable. The denim market is increasing, not retreating, and cotton demand is growing both in the U.S. and globally. Market prices have climbed on the long term uptrend line.

Due to the supply chain shift out of the U.S., Mexico and China are now manufacturing most of the world’s jeans. The tariff will tend to generate more manufacturing in the U.S. Of course, that was the general idea of the tariff as it relates to cotton. As we have stated a number of times, cotton is generally bullet proof to the tariffs.

The market should be expected to remain within its rather wide 83-90 cent trading range going into the August 10 USDA world supply demand report. Since open interest has been increasing, we should expect the market to recover from today’s slight sell-off. In fact, despite Friday’s trading in the red, the market should again mount a challenge of 90 cents.

Crop reports around the globe – especially in Texas, India and in parts of Australia with its pre-plant water issues – should keep a bit of a fire boiling under cotton market prices. Speakers at last week’s New York Stock Exchange (ICE) Cotton Outlook Forum were unanimous that prices would most likely move above 90 cents. As expected, they placed the lower end price resistance at the 82-83 cent area.

The USDA export estimate of 16.2 million bales for the 2017-18 marketing year will prove to be right on the money. I had expected to reach a revised 16.3-16.4 million bales, but USDA’s July estimate appears to be on target.

While export shipments slowed marginally the last three weeks of the 2017-18 marketing year, export sales for the new 2018-19 marketing season that began August 1 have been at a record pace. Sales may not reach the past 16.2 million bale figure due to a smaller crop. However, most of – if not all – of the 2018 U.S. crop will be sold either to domestic or foreign mills.

As the northern hemisphere begins to lay-by the current crop, the echoes of increased planting, especially in the Mid-South, are becoming louder and louder. Scarcity will again engulf the U.S. cotton industry in the 2019-20 season as well.

Give a gift of cotton today.