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Observations from the Wrong Side of the Market

Observations from the Wrong Side of the Market

November’s incredibly bullish world supply demand report seemed to depress the market all week. The old adage of a bearish response to a seemingly bullish report possibly spells doom for the market.  Nevertheless, I wavered, I flipped and I flopped, and the market was met with lower prices almost every day, and the weekly settlement was 76.12, basis December.

Market leadership will switch to the March contract on November 19, as the December contract goes first notice day. Interestingly enough, the March contract did end the week on a positive note, settling the week at 78.29 – up a huge one point on the day, but at least it was in the green. The temptation will be for March to slip back to the three month lows observed in the December 2018 contract – just above 75 cents. Thus, the current five cent trading range of 75.50 to 80.50 cents should continue to hold going into the December USDA world supply demand report.

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The market continues to look for new supply demand news, and, with all the worry about demand, the news could be negative. This could tend to keep the market in the lower end of the trading range and even set the stage for a break below 75 cents. Simply, I did not see that coming and still do not. But we all know I have been on the wrong side of the market since at least September.

However, with both U.S. and world carryover falling, the market will not go down easily. It may fall like a rock if it climbs to 79-80 cents, but the price support at that level is very stiff.  We will continue to observe triple digit trading days.

But then, the response by China to the tariff was more than surprising and took prices lower. The irrational price response is clear that world cotton consumption has been reduced despite lower prices. Cotton’s share of the textile market has fallen from some 60% in 2006-08 to its current 38%. Just as the tariff began, China began to slow its petrochemical fiber production and drove its polyester production lower. However, the response was a 17% rise in polyester prices and only a 2% drop in cotton prices.

China then began dumping polyester generally in Asian markets and particularly in Thailand, Pakistan and Vietnam. This created a rapid increase in polyester yarns at the expense of cotton yarns and a current overstocking of polyester yarns that offer cutthroat competition to cotton yarns. Couple this with the cotton tariff, and polyester consumption began increasing due to heavy-heavy price subsidies the Chinese government gave polyester manufacturers.

Thus, the Chinese used polyester as one way to attempt to get around the tariff and this reduced cotton consumption.

However, the subsidies appeared to end some one-to-two weeks ago, and polyester prices have spiked higher and cotton is beginning to become somewhat competitive. Yet, cotton demand is still challenged, as the only positive sales are BG’s and low grades at deeply discounted prices. Nevertheless, the backlog in polyester yarn stocks are a burden on the cotton market. These must be worked lower.

U.S. cotton failed in its mission to create a market outside of China. Of course, this is not immediately affecting international merchants that handle the vast majority of U.S. cotton, as those merchants have shifted to other growths to replace U.S. cotton.

The good news is that the U.S. trade representatives have noted that trade difficulties for agricultural goods are one of the major items that Washington wants resolved first. Yet, the uncertainty of trade, China’s approach to petrochemical manufacturing, and the impending El Nino facing the 2019 crop portends a bumper 2019 crop. Planted acreage in 2019 could climb to 14.3-14.5 million acres.

I have been an advocate for holding off sales of the remainder of both the 2018 and 2019 crops until the market returned to 80 cents. I now revise that and suggest aggressive pricing for both of those years at 78 cents and better. Resolution of the tariff would promote higher prices.

Give a gift of cotton today.