Supply Fundamentals Bullish as Consumption and Harvest Still Lag
The cotton market moved through the December first notice day with little fanfare, as the nearby March futures contract moved to the top of the 75-80 cent trading range. Market fundamentals are bullish from the supply side of the price equation, but overall weak from the consumption side.
Despite potential record world consumption, demand factors have turned a bit weaker, with China and India – the world’s largest two largest textile economies – under pressure. Also, the Turkish financial crisis has created a drag on the market. Turkey is one of the world’s primary textile economies, and mills have turned very nervous about the first and second quarter of 2019.
Too, Chinese apparel mills have noted their forward apparel sales are lagging projections.
The December supply demand report is not scheduled until December 11, but it is expected to be generally neutral. However, before the 2018-19 marketing season is done, look for U.S. production to be some 200,000-300,000 bales lower. Additionally, world production will likely be about 600,000 bales lower once all the downward adjustments on the Indian crop are made. Adjustments to the demand side of the price equation will likely be small, but some additional drawdown in world stocks is expected.
Turkey is the primary demand market now attracting the most attention. It has, from time to time, been the largest export market for U.S. cotton. Vietnam has claimed that distinction as of late. However, the Turkish demand for U.S. growths is extremely important to the level of U.S. exports. Turkey must remain a vibrant market if the New York March futures contract is to have any chance of topping 80 cents. The Turkish cash crisis appears to be correcting itself. But the cash crunch has not totally resolved itself and will continue to somewhat limit U.S. exports to Turkey.
Much of the U.S. cotton belt remains waterlogged. The Mid-South is almost harvested, but the entire region is waterlogged. Mid-South gins will operate until January, as both round bales and modules remain in storage. The Southeast remains further behind, and growers welcome any dry periods to harvest. West Texas has a small window to restart picking, but some 20% of that crop is still waiting on enough dry weather to harvest. Texas gins will run through March.
Quality has become a major problem, and micronaire issues abound. None of the long range weather forecasts show any long-term periods of dry weather. Thus, growers must harvest small areas as they dry, and are, thus, facing a very inefficient harvest. Most everything in the Southeast and Mid-South is low grade and below grade. Of course, that is the problem across all regions now.
Very heavy resistance built up in the 80 cent area, and that will remain difficult to push through. Likewise, the 75 cent level has become a very solid bottom, and the market appears content to trade between 76 and 78 cents.
Look for this trend to continue into the New Year. The 78 cent-plus area offers solid pricing opportunities.
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