This past Friday the 13th did spook cotton prices…that is if any uncertainty was needed. The goblins and ghosts, absent Casper, were out in force, as well.
The cotton market continues to see some bullish demand fundamentals, but bearish fundamentals are evident as well. The tug of war between the bullish and bearish demand fundamentals is clearly being won by the bears, despite the fact that U.S. export sales and shipments continue to surprise the entire industry.
Yarn demand is slipping as finished textile inventory is building up as the consumer has all but disappeared. The lack of finished product demand caught up with the market, and retail outlets are seeing an unprecedented build-up in inventory (hold on for the sales, if you can).
The market could care less about supply or production at this time. It sees retail demand falling out of bed and it sees the Wall Street collapse. We discussed major problems a month ago, but a business collapse was not one of them. We have, over the years, preached about Wall Street being the principal indicator of the health of the U.S. economy. It is and it will remain so.
Consumer confidence has been very strong and remains so. However, as the coronavirus spread around the world, investor confidence was totally eroded, and the cotton market followed Wall Street – inch by inch, mile after mile right off the ravine. The use of the word “crash” is appropriate.
What went wrong? Look no further than the shutdown of the Italian textile industry. The Italian textile industry employs more than 125,000 Chinese workers in their geographically-centralized textile industry – excellent workers. Most/all of the workers are from Wuhan, China. Thus, the linkages, the dominos, the global chain….and the epicenter of the Chinese coronavirus.
Cotton prices eased down to the 56-cent level I suggested a month ago and where support could be found. However, the market decided to take another cent off that and is now trading the 54-57 cent level, basis the old crop July and the new crop December. Certainly, there remains pressure to take prices lower, but I don’t find any support level, save a disastrous fallout down into the low 40s. Without finding any historical support price, cotton’s fair value certainly remains in the mid-50s, and that is too low to generate any world production of consequence.
Until consumer demand can resurface, cotton prices will remain very depressed. Consumers are staying away out of fear of contracting the virus. The dominos are falling in a different direction than in the first two months of the virus attack. That is, Chinese mills were forced to shut down operations which, in turn, led to concern by retail operations that they would not be able to obtain textile products to sell to the consumer. Those mills are now back to nearly 80% operational, just as the consumer is staying at home trying to prevent being infected with the virus.
Thus, there is a near void of any demand for textile products, and the retail outlet is cancelling orders for apparel and other textile goods. The cut and sew operations, along with the grey goods operations, are beginning to cancel orders held by yarn mills – who, in turn, are beginning to cancel orders previously placed for raw cotton.
Potentially, the market may face a downturn in export sales and shipments. With nearly all of the textile industry’s dominoes flat on the table, cotton prices could easily drop further.
Yet, I did not really expect prices to fall below 55 cents – not even in my worst-case scenario.
All the discussion is about demand. Supply will come into focus very, very soon. The world and U.S. crop will be severely limited, and prices will adjust. Beat up as the bull is, this one will have nine lives.
Give a gift of cotton today.
Dr. O.A. Cleveland is professor emeritus, Agricultural Economics at Mississippi State University.
Source: Cotton Grower