World Production and Carryover Drops, But No Change in Prices
November 13, 2015 The absence of almost anything resembling demand continues to keep cotton prices locked in a near 10-cent trading range. The most active 61-69 cent (plus/minus) range sits like a lead cap over any attempts to move higher, and suggestions of stronger demand seem to disappear as soon as they surface.
Even with lower ending stocks – and most of the world expecting 2015-16 stocks to fall at least another 2-3 million bales – this week’s ICE settlement in the nearby December was a couple points shy of 61.70 cents. Thus, even holding above 62 cents has been difficult.
Yet, I am most reluctant to throw in the towel. I strongly suggest the bottom is in, and the market is simply treading water until news with respect to how much lower the Indian, Chinese, Pakistani and U.S. crops will fall before mills become more aggressive buyers and push prices higher.
Actually, as consumption has waned, U.S. export sales have seen a small increase as business. Sales during the past two weeks have been well over 100,000 bales. Net sales of Upland this week were 127,900 RB. Increases were reported for Vietnam, the newly established leading buyer of U.S. cotton, (35,300 RB); Turkey, now the second largest buyer of U.S., (31,100 RB); China (11,200 RB); Indonesia (9,200 RB); and Taiwan (8,400 RB).
We have mentioned in prior weeks that U.S. consumers have given indications that they were ready to use some of their energy savings for consumer goods and reduce their overall level of savings. Empirical evidence surfaced just this week that Chinese consumers were beginning the same pattern. Of course, one month’s data cannot confirm a trend change. But the signals are now in place, and increased sales have now been witnessed.
Likely the cycle is adjusting, and consumer demand is on the cusp of increasing.
On a bit of a sour note, between hospital visits, I had the opportunity to attend the World Series and then to take family members to a local university sports memorabilia store. To some degree, the events were appalling. My visit to purchase cotton items left me overwhelmed with the fact that most every clothing item was made of chemical fibers. I spoke to the owner, and he indicated he could get cotton items only by badgering the manufacturers…and even then, customers were not asking for cotton.
First, someone please call my university president – and yours, as well – and explain to him that cotton supports the university and the ball teams, and fans can and will wear cotton if they so demand (Did Texas Tech actually do that? They claim they did). Write in and tell me what a small market that is, then put your head back in the sand. You are part of cotton’s continuing problem of losing market share. Now tell me the cotton product is too costly, and then remember you too are part of the cotton demand problem and have been conned.
True story. Cotton growers used to take a very active part in promoting the use of COTTON. Remember the water towers, the television advertising, the TODAY show, the pride? Yes, I am just an old has-been. You are the grower and the businessman.
Chemical fibers in China are selling for some 48 cents a pound – nearly half that of cotton. Too, the Chinese government continues to add to its chemical fiber manufacturing base. Nevertheless, when San Joaquin Valley cotton businesses complain that their customers do not want cotton and are asking for chemical fibers instead, then there has been a fumble somewhere, and a few interceptions as well.
Off the soapbox. Seemingly unnoticed again in this month’s supply demand report was the continuing decline in quality stocks available to the world market. It is this fundamental that will pull prices higher in the early months of 2016.
Currently the USDA forecast is that there will be only 40.6 million bales in ending stocks outside of China. This is some 3.5 million below the year-ago level. Too, world production is forecast at the lowest level since 2009.
As indicated, most analysts strongly believe the USDA estimates will be further reduced by several million bales. As these fundamentals filter into the market, the basis for high grades will further tighten, adding strength to the market. Too, with any improvement in demand, the May/July contracts will find their trading range extended above the current 69 -70 cent top and to within the 73-78 cent trading range for basis grade 31-3-36 and better.
The current trading advice remains unchanged. Sell physical crop as harvested, collect the LDP and purchase a 3-4 cent out-of-the-money July call option. If willing to accept the risk, consider also selling the 4-5 cent out-of-the-money May put option to reduce the outlay for the July call.
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