Market Looking for Demand News as Shutdown Ends
As dull as the cotton market has been over the past month, news of a temporary end of the government shutdown has spurred interest in the market. Likely, most of the excitement goes no deeper than just the idea that USDA’s role of collecting and disseminating data will again begin.
Finally, verifiable data about market fundamentals will be available to offer suggestions of market direction and speed of market price reaction. While one should not assume the end of the shutdown is anything but temporary, as least some news will be available.
The 70-77 cent trading range remains in force, as does the even tighter 72-75 cent range. While USDA will provide the heretofore unpublished data by the end of the week of January 26, the market will likely continue to trade within the seven cent 70-77 cent trading range. Even the narrow very tight three cent range between 72 and 75 cents can be expected to hold. Possibly there could be marginal trading on either side of that range. The market is looking for some demand news – and specifically news of an upsurge in U.S. export sales. Yet, while some export business has been completed over the past month, a strong upsurge in sales is not expected.
Prices will remain under pressure of the steep competition the U.S. is facing in the international market, now that both Chinese and Turkish mills have scaled back production. The return to 72-74 cent trading uncovered good demand for U.S. growths around the world, but most all of that came for locations already scheduled to purchase U.S. cotton. China has continued to purchase West African, Australian and Brazilian in lieu of U.S. growths. Yet, the U.S. should uncover markets in India and Pakistan.
While the China-U.S. tariff war has become a major disruption to all agricultural commodity markets, a portion of Washington’s agenda is succeeding as much as the U.S. government had suggested. While China continues major subsidies to its agricultural industries, including cotton, the Chinese economy is falling apart at the seams, and consumer purchasing power is rapidly being depleted. Just as the agricultural sector in the U.S. is hurting, the Chinese consumer is having economic pressure brought to bear on him. This was Washington’s expected outcome, and now the pressure is on China to settle the dispute.
When the circus ends is anyone’s guess, but negotiations have reached a serious stage. For decades – truly decades – no one challenged China. Now, the U.S. has.
While the short-term trend in cotton is neutral to bearish, the basis for high quality cotton has improved, and growers with such cotton will be rewarded. Futures prices have been locked. But again, the cash basis has improved and will improve further. Yet, the bulk of the U.S. and world carryover is of average to lower grades. Consequently, New York futures will have difficulty on any advance above 78 cents. The overhead price resistance near the 77.50 cent level will likely halt any attempt to advance.
We continue to caution growers that with any help from Mother Nature, the U.S. is facing a 22-26 million bale crop in 2019. Consequently, the price pressure brought on the December 2019 futures contract will become substantial. Growers are advised to increase their coverage at 75 cents, basis December.
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