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Market Fueled by Demand, Mills and Shrinking Carryover

Market Fueled by Demand, Mills and Shrinking Carryover

New York ICE cotton futures – buoyed by demand, speculative funds and basic fundamentals – continue to hold tight to the 75-76 cent level.

The active trading range remains very narrow, well within a 150-200 point range, as the old crop spot March contract continues to approach first notice day. Mills continue to hold tight to their on-call sales, doing nothing but prolonging their day of misery.

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The USDA February supply demand report released February 9 was marginally supportive given the raw numbers, but was very supportive in that USDA finally acknowledged the significant improvement that has been noted in demand the past six months.

Make no mistake, it is the demand side of the price equation that has led the charge higher. There may have been a lot of window dressing surrounding the demand fundamentals, but demand has taken prices to the mid-70 cent level. Look for the market to continue to back and fill and trade the 73.50 to 78.50 cent range. But, the pressure will be to hold the 75 cent-plus level.

Mills did some fixations and reduced their on-call sales, down to 28,567 contracts on the March. Yet, that was a paltry reduction of 3,816 contracts. It is reasonable to think they must reduce those by some 20,000 or more this coming week – a HUGE amount. The ratio of on-call sales to on-call purchases for the March contract is about 8:1, still well out of line to allow for lower prices. The ratio for all (March, May and July) old crop on-call sales versus on-call purchases now stands at 10:1 – a bullish phenomenon.

Thus, as hypothesized last week, mills are merely kicking the can down the road and will face the same pricing misery on the May contract, and we foretell the same for the July contract.

USDA lagged in another 200,000 bale increase in its export projection this month, after two prior monthly increases of 300,000 and 200,000 bales, respectively, and now project 2016-17 export sales at 12.7 million bales. The Department transferred that change directly to carryover, lowering carryover from its January estimate of 5.0 million bales down to 4.8 million. Look for year-ending exports to climb to a range of 13.2 to 13.5 million bales.

Yes, 13.5 would represent a banner year. But while USDA did not change its estimate of U.S. production (leaving it at 17 million bales), the actual crop could grow to 17.3 to 17.4 million bales, and all that increase would go to exports. Carryover could, by marketing year end, slip to 4.2 to 4.4 million bales – 400,000-600,000 lower than the current USDA estimate.

As expected, the world projections showed smaller production, larger consumption and declining world carryover. Consumption was increased some 750,000 bales, and world carryover was reduced by a similar amount. Yet, as also expected, the Chinese crop was increased some 500,000 bales, with minor reductions in other countries and further data adjustments.

Thus, world carryover is now estimated just shy of 90 million bales. More importantly, however, carryover outside of China was more than a million bales lower.

That is, supplies available to the world market were reduced more than a million bales, now down to only about 41 million bales. Take out some 11 million bales needed for India, as I understand USDA, and that leaves only some 30 million bales from all sources available for export in 2017-18. Add to this (subtract) the world supply demand spread for 2017 new crop, and the market could be pressed to meet demand. Supplies in 2017-18 could be very tight if Mother Nature is not cooperative.

Yet, long-range weather forecasts call for normality/average/typical – whatever that is. Thus, supply shortage is not expected, other than just enough to keep the market on edge. Looking at new crop is all but a look back to a half century ago. For real old timers – like me – the return of the hog round contract is back with us. While merchant offers for the 2017 crop to Mid-South and Southeast growers are roughly 150 points on for 41-4-35 to 300 points on for 31-3-35 (good offers), the Southwest grower is being offered an acre contract (the old hog round) for maybe 200 to 300 points off.

The idea of an acre contract speaks of a plantings increase up to as high as 11.4 million acres. That is very high, some 600,000 acres more than the Beltwide estimate. The NCC intentions announced this weekend projected 11.0 million acres, somewhat short of the Beltwide estimate. Yet, remember that estimate was based on roughly conditions during the first two weeks in January, and the strong price increase – above 73 cents, basis December – has occurred since then.

Nevertheless, the offers for 2017 crop have climbed into the upper third of the historical price range. Thus, I suggest growers look to price 50% – that is, one half of the anticipated 2017 crop – at this level, i.e., now.

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