Cotton prices closed the week on a sweet roll, so to speak, with the old crop May enjoying a six-session gain of 596 points and the new crop December closing the week at 55.96 – a six-session gain of 555 points.
Too, Friday’s (April 10) gains came on the heels of the release of a very bearish April USDA world supply demand report. Possibly, the market had already accounted for the bearish report, as post report trading saw the market end some 50 plus points higher on the day. Thus, the market is now some 15-18 cents lower than mid-February prices. Nevertheless, expect prices to be between 53 and 58 cents when the next world supply demand report is released on May 12.
The week-long move to the upside hopefully will beget yet even higher prices. Let’s hope so. I am not writing it off, but most likely the Dow Jones has another test of the downside before calling it quits. Cotton will be tempted to move lower if such occurs. Buying cotton calls then will be stout advice, even if you have to do so with borrowed funds.
Yet, should domestic Chinese cotton prices hold strong in spite of a Wall Street selloff, then cotton prices can also move higher even if the Dow hits another selling spree. That is, higher prices in China will signal the beginning of a new build-up in cotton demand.
USDA’s April supply demand report was essentially more bearish than any report I had previously seen – ever. Essentially, it was a “catch up” report in response to not making any meaningful changes last month. Thankfully, the market had already accounted for the change. Yet, despite the drastic change, the market was able to finish higher after the report was released.
U.S. exports were reduced 1.5 million bales, down to 15 million. U.S. carryover was increased to 6.7 million bales due to the export reduction and coupled with a 100,000-bale reduction in U.S. consumption. World Consumption was lowered 7.6 million bales, down to 110.6 million. World carryover was increased to 91.3 million bales, up from last month’s 83.40 million.
No question, the Chinese virus has brought the world cotton industry to its knees. Effectively, it will become the reason China will lose as much as 50% of its textile industry base, and it will have a devastating impact on the Chinese economy. Further, it will lead to a reduction in cotton production in China.
The report certainly takes the bloom off my thoughts that as much as an 8-cent rally could be in the works – unless U.S. exports can move upward at least 500,000 bales. A 6.7 million bale U.S. carryover simply will keep a 55-59 cent cap on any rally. However, with only an 18 million bale crop in the works for the U.S in 2020, the back months March/May/July 2021 contract will move into the upper 60s.
In addition to a smaller crop in the U.S., look for the same in China, India, Turkey and Central Asia.
A spot of positive news: The seed cotton payment, to be paid in October-November, will likely be near 6 cents. Thank the National Cotton Council.
Give a gift of cotton today.