Welcome to Cotton Market Roulette, Chinese Style
March 3, 2019 Cotton prices took a ride on the Reading this past week as the nearby May settled at 73.85, up 84 points on the week. December was up 27 points, settling at 73.78 cents.
The higher weekly settlements were generated from the speakers’ optimism at the annual Mid-South Farm and Gin Show in Memphis. In reality, the ole cotton boll just keeps bouncing between mill buying at 72 cents and below and the heavy price resistance at the 74-75 cent level.
It’s more like roulette, Chinese style. That great fundamental – governmental activity – is in control and has introduced uncertainty for all. Only when the roulette wheel stops will we know where we are. The trade battle has placed a very tight band around the trading range, and the longer it stays in place, the weaker the support will become.
The implementation of the U.S. tariff program actually encouraged the U.S. to import non-U.S. cotton and to accept the fact that effectively China would not import U.S. cotton. While the tariff program may have been efficient and beneficial for some aspects of the economy, it has turned its back on the U.S. cotton farmer and walked away, leaving him to fight for survival. The cotton market is locked until the free market is allowed to operate outside of legislative and other government inequities.
That said, cotton growers exhibited optimism at the Farm and Gin Show. Speakers’ comments were couched in terms of:
- When will the tariff end?
- How soon will the tariff end?
- Will it be next week?
- Is Brazil really a threat?
All assumed the tariff would end shortly, and that business would be as usual upon resolution. Let’s all hope so. But as I have written many times, I don’t feel the market will return to so-called “normal” operations. In fact, the world flow of cotton may have already been permanently changed.
Gin show speakers threw out a price range of 95 cents down to 55 cents once the trade tiff ends. The wide price range was primarily impacted by thoughts of how much cotton China would buy to how large the 2019 U.S. crop will be. Additionally, speculators are generally out of the cotton market. Should they decide to return, then a bull could get loose in the ring.
The consensus was that China would be an aggressive buyer and that prices could jump as much as 20 cents higher. Yet, at the same time, all speakers cautioned growers that China might still buy cotton from Brazil and other countries. In this situation, any price advance would be limited to 200-300 points at best.
An optimistic 2019 crop price outlook is founded on the conclusion of the trade war and crop size of only 20 million bales. The U.S. crop is bracketed at 20-24 million bales. The current situation; however, would suggest that the U.S. crop will climb to a record high – more than 24 million bales – and limit any price advance beyond 75 cents, basis December. All regions have excellent moisture, with only the Southwest needing planting moisture, but with its wet season in front of it. This is the basis for expecting a record U.S. production.
Growers are cautioned that most analysts suggest that the price risk faced by growers this season is the most they have ever faced. A 20-cent drop in prices is expected by some. While a 20-cent advance is not out of the question, the chance for lower prices outweighs that of higher prices, since U.S. ending stocks could balloon to 8-9 million bales.
Finally, growers should consider using puts to protect them from the increasing risk of lower prices and should be very aggressive price fixers on any December move to 75 cents.
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