By O. A. Cleveland, Consulting Economist, Cotton Experts
Fittingly the circus midway has come to the cotton market, “round and round and round she goes, where she stops no one knows.” It’s a catchy theme and one that is catching more than a few textile mills as they scramble to buy into the market to complete their pricing, i.e., price fixations on the July contract.
The world cotton surplus has been resolved and once again the market is at the whims of Mother Nature. She is holding all the new crop cards. Only speculators and mills are trading the July…and contract cards…and the mills are weak. The market has some more juice in it.
The market has pieced together a long array of bullish factors, somewhat concealed at times, but has strung them together like shining pears. While the U.S. was harvesting a record yield the world’s largest producer, India, was suffering from a severe barrage of production problems. Chinese production was okay and the Pakistani crop had some setbacks. The Australian and Brazilian crops were likewise okay, but not impressive. Australia and Brazilsold all of their 2018 crop and Australia has now committed all of the 2019 crop it dares without major moisture patters coming to the area. Many of the African countries were hampered by infrastructure and/or government instability.
The big 2018 U.S. crop had most parties, and even USDA, thinking that the world would be awash in cotton in 2018 and again in 2019, thereby taking prices down to the mid to low 60’s. But, they had only one eye open. They missed the significant backlog in demand that was steadily building. Too, most totally missed the fact that polyester prices were rising as first China, and even very recently Vietnam, began to shutter numerous polyester facilities. Those polyester manufacturing closings were due to the environmental quality degradation caused in the production of polyester.
Now that polyester has proved to be non-stainable the next fiber we find harming the environment is tencel. The net result of the interaction of all these factors was 90 cent cotton. Consumer demand was pulling on prices just as production difficulties were pushing prices higher.
The new crop December contract is reasonably comfortable. December will likely settle into an 85-95 cent trading range. The old crop July price will continue to climb as long as textile mills continue to play Indian Poker. July is not trading cotton. Rather it is playing the game of mills versus speculators, but with only one rule. Mills must close out their positions in 15 days (positions that cannot be rolled to a later month). Mills will purchase several million bales of 90 cent plus cotton.
Aside from the weather anomalies in the U.S. and China, the market finds strong bullish pressure from the aforementioned on-call sales. There remain some 4.1 million bales of cotton to be fixed (priced) on the July contract in just a day over two weeks. The market worked off about 500,000 a week ago, but it has a long way to go to clear out the entire 4.1 million bales. Thus, mills will be aggressive buyers of the July contract for the remainder of the two week period. This will be very supportive of prices. Demand remains very active. Look for both July and December to continue trading above 90 cents. Plant more cotton. Price up to 75% of expected production.
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Source: Agfax