Ugly Export Numbers Finally Catch Up With Cotton Prices
July 27, 2020 The series of big, ugly weekly export sales reports finally caught up with cotton prices, as the week ended with a triple digit selloff – down 182 points on Friday (July 24) alone – and settling the week at 60.10 cents. While prices had climbed to a four month high to near 65 cents, they have now given back some five cents in just over a week.
We had noted the miserable weekly export sales reports last week, and another was reported this week. Additionally, while there was some positive news regarding consumer purchases of cotton, the fact remains that consumer cotton purchases are lagging.
The market should be expected to continue in the 57.50 to 65 cent range. However, the potential for a “bigger and better” crop will keep significant pressure on prices. However, I am not one that is expecting a bigger crop. It is getting smaller. But, you are cautioned, it may not be wise to bet against the seed breeder.
The weekly export sales and shipments report showed a negative net sales figure for the second consecutive week. Sale cancellations exceeded new sales again this week, as net cotton sales were a negative 13,500 bales.
That is not truly the bearish news. The bearish news is that once again the U.S. made sales to only six countries this week. Even at that, the largest buyer – Vietnam – purchased only 2,500 bales. Four of the six countries purchased 600 bales or less. In reality, nothing. These sales were made when futures prices were some three to five cents higher than current prices. Thus, mills were demonstrating that even with what little business they were considering, they were willing to wait for lower prices.
While sales are seasonally slow this time of year, current sales are historically low. Yet, it was somewhat unusual for “next marketing year” sales to be as seasonally low as was reported. That is, net sales of only 10,900 bales were recorded for the 2020-21 marketing year. Of course, all of this can be traced directly to the coronavirus and the devastation it has reaped on the world cotton economy.
Consumption news also spooked the cotton market this week in the form of a consumer spending survey reported in the Sourcing News. The survey revealed that while consumer spending for back to school apparel would increase, the amount spent on cotton and cotton/rich goods was decreasing. Thus, the world cotton industry’s challenge to change consumer tastes and preferences back to cotton is ongoing as the industry struggles to maintain its denim base.
Many will speak of the saber rattling between China and the U.S. or between China and “pick any country one wishes.” There is some truth to that, especially in the financial markets, but not so much directly related to cotton. Yet, I would be remiss not to point out that empirically, some 60-80% of the variation in cotton prices can be traced to actions by China. Yet, China is on track to become the largest buyer of U.S. cotton in the world. The coronavirus, world consumption and world production stand at the headwaters of the current price activity in world cotton prices.
Production in the U.S., and around the globe, has received mostly good news the past two weeks. The world crop looks very good in most countries. However, as we know looks can be deceiving. The Southeast and Mid-South crops look “very good” and have an excellent fruit load. Many are reporting some four to five bale equivalents of fruit on the plants. The U.S. seed breeders have become the real heroes of the U.S. cotton industry.
Yet, this “good looking” crop in the Mid-South and Southeast has a questionable fruit system. While genetics have vastly improved, typically a poor root system produces a poor yield. Thus, if the U.S. crop is to climb above 17 million bales, both regions will need very timely rains. Irrigation is very helpful, but the crops have been heavy users of water the past two weeks. Without very timely water – again, VERY timely – the root system will not be able to support the plant’s fruit.
Thus, a 16.0-16.5 million bale crop is on the horizon in the U.S. Such a crop, or smaller, will support prices in the current trading range.
Growers are encouraged to use put options when and if December futures return to the 63-cent level. Expect the market to continue within its 57.50 to 65 cent range.
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