Slow But Positive News Brightens Cotton’s Outlook
March 30, 2020 Is it the end of a tunnel? Is that a light?
After losing about 20 cents in some 20 days, the cotton market appears ready to dig in and hold its ground. At least, there are a few positive signs, particularly with new crop prices. Nevertheless, downside price risk cannot be written off just yet. The potential of a further five cent drop remains a possibility for old crop, but new crop prices should be able to hold above the 50-cent level and move higher.
The new crop December contract is showing signs of strength. Textile mill closings – coupled with the closure of retail outlets around the world – have wreaked havoc on cotton prices. Yet, market prices, while still experiencing some daily triple digit moves, are showing a bit less volatility. The very low 50s appear to be holding for old crop, while the December contract is looking to challenge 56 cents.
The remaining old crop contracts – May and July – appear to be stuck with the effects of the coronavirus. Textile operations around the globe are shuttered in most locations. China and the Indian subcontinent account for approximately 80% of the world’s cotton spinning activity, and well more than half of those operations are closed for at least another two to three weeks. India’s announcement this week that it was ceasing all business activity for at least three weeks was the lead factor. India accounts for nearly 20% of the world’s population and all business activity is halted for another two plus weeks.
Too, many operations in Pakistan and Bangladesh are closed, as well as pockets in China and other locations. Many of the Turkish mills have closed. Vietnam is generally open.
Yarn is moving sporadically as apparel orders have dwindled to only a trickle due to the multitude of closed retail outlets. Delivery dates of both raw cotton to mills and yarn and apparel orders are routinely being delayed. The supply chain is gradually reopening, but only sporadically and only partially. Thus, the demand side of the price equation will continue to be severely impacted for another 60-120 days.
U.S. export sales remain very active. In fact, sales have been so strong that it is now expected that delivery of the bulk of the remaining current year sales will, at some time, be moved to the next marketing year. Mills are taking advantage of the current low prices and will later exercise their option to postpone delivery until after August 1, 2020 – the beginning of the 2020-21 marketing year…and when cotton prices will be higher.
The potential good price news is that 2020 crop plantings will be severely restricted. Thus, it is expected that the December 2020 and all the 2021-22 contract months will experience a significant rebound in prices due to the combination of a small crop and pent-up demand scenario.
USDA will add another rung in the U.S. grower planting intentions ladder next week. Recent estimates range from 11.6 to 12.6 million acres. Soybeans and corn will gain acres, although the outlook for soybean prices is extremely negative. Cotton growers that stay with cotton will likely be rewarded.
Look for Pakistan, China, Turkey, India and the U.S. to lead the parade to lower cotton plantings this season – the key to higher prices.
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