A Johnny Cash hit took center stage in the cotton market all week as prices went “Down, Down, Down in a Burning Ring of Fire.” Likely you did not want to hear that, yet it is very appropriate (“…and the Flames Went Higher”).
The good news is that the market also formed a technical “Waterfall Pattern,” indicating the bottom is in…maybe. Given that I previously expected the bottom to be near 81-82 cents, I had to add the “maybe.”
Official Washington, across the board, keeps inflation on the front burner as government spending only rises, choking off any appreciable change in demand. Yet, should the market feel that the U.S. loses even more control of its economy, then the dreaded 60s come into play – and I am on record of saying that could not happen. Thus, for now, the market will likely see the six-cent trading range of 74-80 cents.
USDA’s November supply demand report was marginally market negative as U.S, India, China, and World ending stocks eased higher. That is, ending stocks in three of the world’s four largest producing countries saw ending stock estimates increase this month – not a good scenario for higher prices.
The market price waterfall chart formation was based entirely of the very negative attitude regarding world cotton demand and the slippage of the U.S. production world ranking falling to fourth behind China, India, and Brazil – and very possibly falling from its lifetime spot as the world’s leading exporter to the second on that list. The U.S. cotton industry has an entirely different set of challenges it must face. Yet, there should be a multitude of optimism as growers are being offered more and more higher yielding varieties, and a new plateau of yields is forthcoming.
Yet, making no mistake, demand is the only real culprit.
USDA’s November supply demand report pegged world production at 113.5 million bales, up 1.1 million from the October estimate. World consumption was lowered 500,000 bales, down to 115.3 million. World carryover increased 1.6 million bales, up to 81.5 million bales. Most expect USDA to further lower world consumption in the coming months, perhaps by as much as one million bales.
Chinese imports were increased 500,000 bales, up to 10.5 million. However, USDA did not increase Chinese demand, as their cotton purchases have been to replenish the national cotton reserve. That is, most of China’s imports do not represent an increase in demand, but rather a movement from one warehouse (outside China) to another warehouse (inside China). It is very important to note that China is increasing its national reserve with good quality cotton at a very low price. That is, the world cotton price is an offer they can’t refuse.
China was the major buyer of U.S. cotton again this week, taking a net of 262,200 bales of upland. Thus, China has bought some 590,000 bales from the U.S. in just the prior two weeks. Recall we commented several weeks ago that China would continue buying from the U.S. in volume.
Said again, China is just replenishing its reserve stocks at fire sale prices. The sales do not, and will not, have any impact on price. The price impact will come only when cotton spinning activity increases. Yet, at present, most mills complain of very low to negative margins and will not build any inventory of yarn. Spinning occurs only as yarn sales are made – that is, only on an as-needed basis.
Please let me be wrong (or incorrect, as one English teacher suggested), but the U.S. economy and much of the world economy is in the pits. Interest rates will likely continue to rise. The absolute best we can hope for is that rates remain stable as they are not going down in the next 6-to-12 months. Inflation will teeter around the current 3.5-5.0% range.
The U.S. must pay to house, feed, clothe, provide medical care, child assistance, education, and other care for some 5-to-6 million new inhabitants that will live almost entirely on government money. The new inhabitants will not offer any appreciable addition to the GNP. That is an absolute recipe for inflation. Thus, the Fed will either raise interest rates or allow inflation to ease higher – a historical mistake that will not happen again “for sure.”
Too, we will all continue to complain about the Fed. Either way, the U.S. and much of the world will continue to suffer very challenging business activity which will continue to haunt the cotton economy in the form of continued poor demand for cotton for at least another 6-to-12 months, hopefully no longer.
Please be incorrect.
Growers are encouraged to sell physical cotton at harvest and purchase 3-to-4 cent out-of-the-money call options as an alternative to holding cotton or being responsible for storage and carrying costs. A grower should never pay for storage. There are several alternatives, the most popular being to also sell 8-to-15 cent out of calls to help pay for the premium of buying the calls. Either way, one must understand the strategy and its implications.
It is always darkest before dawn. So again remember, growing cotton is a calling.
Give a gift of cotton today.
Dr. O.A. Cleveland is professor emeritus, Agricultural Economics at Mississippi State University.
Source: cottongrower.com