There’s Momentum in the Market
April 5, 2019 What a difference a day makes!
Ever since last Friday’s USDA’s indication that cotton plantings would likely be some 500,000-700,000 acres less than market expectations, cotton prices have moved higher and higher. The momentum is still in the market.
The smaller-than-expected U.S. plantings brought out Chinese government buyers, and they were looking for U.S. styles. The bullish factors: swine flu disaster in China, reduced 2019 U.S. plantings, the strongest signals to date of a conclusion in the U.S.-China trade tiff, strong Indian export sales and declining Indian carryover, a resurgence in U.S. export sales and shipments…and the list goes on.
Almost certainly capped at 75 cents two weeks ago, the new crop December futures contract can now see a few more cents, maybe even 80 cents. Yet, the concern of supply outstripping demand in 2019-20 is real. Additionally, growers have aggressively contracted cotton with merchants, but have delayed pricing – a side note that could pressure prices later in the growing season.
U.S. export sales for the week totaled a net of 489,600 bales (upland 473,200/Pima 16,400) for 2018-19 and 2019-20 (details of the report are online). Equally impressive were export shipments, totaling 410,900 bales of upland and 17,000 bales of Pima. This brought shipments back in line with USDA’s projected export target of 15.0 million bales.
Sales were made to some 17 countries – short of the 20+ used as our barometer for measuring strong demand. However, China was an excellent buyer of old crop at 69,900 bales of upland, with new crop upland purchases of 118,800 bales.
Very important to the market was Washington’s announcement that significant progress had finally been made in technology trade issues. The U.S.-China trade disagreement has always been about technology and never about agriculture. China introduced agricultural trade in an attempt to pressure Washington. That pressure now failing, China has agreed to the more important technology issues. This is freeing U.S. agriculture from the Chinese sanctions.
Thus, the potential cotton trade with China is now blossoming, and the uncovered Chinese demand is taking prices higher. China will buy additional U.S. cotton, but 2020 purchases will still be skewed toward China’s new found cotton trading partner Brazil.
Adding to old crop bullishness is the fact that May and July futures contracts do not have any natural sellers. Old crop on-call purchases (requiring the selling of contracts) are very limited, while old crop on-call sales ratio to purchases for July (requiring the buying of futures) are some 8 to 1. This ratio is supportive of higher July futures prices.
Mother Nature gave most cotton growers a banner week, and most appear to have another coming. While corn planting made excellent planting progress across the Mid-South in the past week, the very end of the planting window has arrived, and cotton will get some of the intended corn area. However, the boost to cotton acreage will be limited. Thus, the U.S. is likely looking at cotton production between 21 and 22 million bales instead of the 24 million thought possible just two weeks ago.
This change in the supply demand balance sheet will provide a bullish underpinning at the 73-cent level, basis the December contract. We were aggressive hedgers at 75 cents in December and will now wait for an attempt to climb to 80 cents. December was up some 140 points on the week, and demand suggests another 300-400 points is on the way. Nevertheless, some of it will be akin to sitting in a dental chair.
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