Cotton prices struggled all week to hold the 70-cent level but failed day after day to close above its critical support at the 69-70 cent range. December settled the week at 66.81, down nearly 4 cents on the week.
And to think I had turned positive on the market.
The prior week’s close was essentially 71 cents, and traders expected cotton futures, basis December, to move above 72 cents and challenge 73 cents. In other reports, all news appeared negative for a price return above 72 cents.
U.S. export sales were weak, the Producer Price Index (a proxy for inflation) indicated the U.S. economy was inflating at a higher pace than expected, the Consumer Price Index itself showed growing inflation, and interest rates defied the Fed’s attempt to lower rates as the 5-, 10-, and 20-year rates moved measurably higher. However, retail sales continued to increase, but apparel sales did not.
Thus, the demand for cotton continues very weak. More concerning, however, only slight improvement is expected until mid-year 2025, at the earliest. However, new crop export sales are nonexistent – a sign that cotton’s demand woes could last the entirety of 2025.
The rest of 2024 will likely see the nearby contract trade in the six cent 66-72 cent range – both a lower and wider price range than previously predicted. Yet, most of the trading will be within the 67-71 cent range with a bias to climb back to 70 cents.
As reflected in trading, it is difficult to find any bullish signal in the market. As much as I would prefer to discuss higher prices, I simply cannot invent bullish comments. Neither can I use simple adjectives that would allow one to infer that the bears are ready to hibernate. They will, but not until sometime in 2025. The only bullish factor is the adage “Low prices cure low prices.” Sounds good, and it is true.
However, most tend to forget, or even realize, that the U.S. has lost its leadership position in the world cotton economy. Long ago, 30 years or more, the U.S. lost any relevance as a textile manufacturer. Today, the U.S. has only 1% or less of the world’s textile spinning industry. The U.S. has slipped to the fourth slot in world cotton production. Forever, the U.S was the world’s major exporter of cotton. Two years ago, that crown was lost.
The combination of these shifts has left the U.S. as just a player in the world cotton industry. This is just an anomaly and takes me back to my soldier days in Vietnam where we quickly learned the expression “Never Happen GI.” These changes will not change, Never Happen GI. They are permanent. The structure of the world cotton industry has changed. The U.S. grower must get back to leading the parade or it will run over him.
The change in market structure caught us napping. The U.S. does not have a dedicated promotion program. The U.S. had previously never been challenged in the export market and is fumbling, with no plan to promote U.S. cotton.
Most mills prefer U.S. cotton for three primary reasons:
- U.S. cotton tends to be more uniform and is easier to spin.
- Delivery is highly reliable and allows for smoother operations.
- The U.S. cotton trade is supported by an effective, self-regulated contractual system, protecting the buyer and seller.
In fact, most mills are willing to pay 100-200 points more for U.S. cotton compared to comparable growths. However, the cost of production is 5-7 cents per pound lower for Brazilian cotton. This cost of production advantage allows Brazil to take market share. It allows Brazil to increase its land area planted to cotton. More importantly, it allows Brazilian growers to cover their cost of production at current New York futures prices, while U.S. growers cannot justify planting cotton at current prices. Thus, without promotion efforts, U.S. cotton production will continue to decline.
Despite research, the U.S. has become a high-cost producer and, more often than not, New York futures will not cover production costs except for the low-cost producers.
December is entering its expiry period; thus, March will be the lead contract. Prices are expected to return to the 70-cent mark, basis the March contract. Too, price advancement will struggle to move closer to 74 cents.
Promote cotton!
Give a gift of cotton today.
Dr. O.A. Cleveland is professor emeritus, Agricultural Economics at Mississippi State University.
Source: cottongrower.com