By Jeff Thompson, Autauga Quality Cotton Association
How often have you heard the uncanny remark, “No two years are alike in the cotton business, but that makes it exciting!”
Well, could I request a little less excitement, please? Weather extremes this spring have played havoc with planting efforts, resulting in delays and erratic stands.
As of late, market prices once threatening a dollar a pound, are now falling victim to an all-out trade war between two superpowers.
A little normalcy would be very welcomed. Otherwise, hold on tight for what could be a summer full of twist and turns and hills and valleys.
Our climb into the 90-cent range proved short lived as cotton prices made an abrupt reversal late last week. Up to now, the few market corrections we’ve had have been minor and quickly followed by rallies to new highs.
This Isn’t Your Regular Sell-Off
In comparison, this sell-off has been much more severe and it’s now into its third day.
Since the opening of the market on Monday, June 18 (three trading sessions, ago) new crop prices have given up over nine cents, settling Tuesday at 83.82. Several factors have come together to precipitate this decline – rainfall in the Southwest, speculator profit taking
But most injurious has been an escalation in the trade war between the U.S. and China. What was simply rumor a few weeks ago has now resulted in each side citing specifics terms, with cotton included on China’s list of ag imports to which retaliatory tariffs will be imposed.
Both parties seem more adamant about carrying through with this than they did a few weeks back when cooler heads prevailed. As one would expect, this has led to much uncertainty and negative market reaction.
Yes, But Don’t Panic: The Backdoor Is Open
Having the two largest world economies butting heads over trade is never a good thing, but we would caution that this is not the time to panic.
The strong cotton fundamentals, which drove prices to their lofty levels, remain unchanged. In the face of strengthening demand, global consumption will once again exceed world production. Thereby, we remain quite confident this market is well supportive at current levels.
China, though appearing to play hardball, can’t overlook its growing shortage of cotton the type the U.S. abundantly produces.
China is renowned for “back dooring” ag products over the years. By purchasing yarn spun from U.S. cotton from other countries, they can save face and still satisfy their mill needs.
So, rest assured, if we don’t sell directly to China we will sell our cotton to someone. We had no problem moving a 20 million bale plus domestic crop last year, a third or more of which was inferior in quality. Therefore, selling a 19.5 million bale crop should prove very doable despite China’s claims of retaliation.
Texas Got Good Rainfall, But…
Domestically, West Texas has received some significant rainfall as of late, thanks to two tropical weather systems. In some areas it was timely enough to get a stand of cotton, possibly reducing what was potentially a sizeable dryland abandonment.
Even so, with a lack of subsoil moisture, this crop has a long way to go and will be dependent on continued rains to make a crop. For this reason, USDA’s 19.5 million bale production estimate is still in jeopardy.
All this said, we firmly believe there is solid support for prices in the mid 80s. So, don’t get too alarmed by the news of the day and this reversal.
85-Cent Cotton Ain’t All Bad
China will not let their mills set idle and polyester’s new environmentally unfriendly image will hinder their decision to make a switch to man-made fibers.
Putting aside where prices have been, the ability to price cotton at 85 cents isn’t such a bad thing. How many years have you sold for much less?
At the same time, we remain quite confident much of this reversal will be retraced and advise against any panic selling. Furthermore, another run into the 90s can’t be dismissed if a hiccup in production occurs anywhere.