The ole bull still has a few more visits to the feeding trough, as demonstrated this week.
However the old bull is beginning to get long in the tooth. That is, old crop prices will press toward 80 cents, but will fall flat on its face if it ever climbs near 84 cents. Yet, the new 2014 crop has much more downside risk than upside potential. It will likely never see the 80 cent mark again. In fact, I believe it will have a fight on its hands just to keep its head above the 72 cent level.
Then there is the infamous saying, “Other Things Being Equal.” A continuance of the Texas drought, a couple of significant planting issues in India or China, or some other anomaly could alter the outcome.
Most seem to be afraid or possibly intimidated by ChinaΆs national cotton reserve. As a result they have cotton prices falling to 65 cents or lower just any day now. That cotton will not be dumped on the market, it is too valuable. Interest and storage cost to the government are meaningless, even at $3 billion a year, i.e., what government has ever been concerned with interest costs, especially a central planned government?
Just as the U.S. has a national reserve for oil and other products, the Chinese maintain a national reserve for cotton. The price of national reserve cotton sold to textile a mill some 150 percent the amount those same mills could pay for imported cotton. However, much of the imported cotton is taxed at 40 percent to discourage imports.
Yet, the imported cotton is still cheaper even when taxed at 40 percent. At current prices Chinese mills continue to aggressively purchase U.S. cotton. The limiting factor for U.S. export sales this season is availability. That is, the small U.S. production coupled with low carryover simply constrains how much can be sold.
USDA needs to increase its estimate of U.S. export sales, but is challenged because it is uncertain of availability. Too, as has been stated several times over the recent months, the world shortage of quality cotton makes U.S. production in an even greater demand situation. West Texas production, now known for its quality, has been the primary benefactor of export demand.
It is the combination of this limited availability of quality cotton, coupled with greater than expected import demand from China, that has led to stronger U.S. exports. Too, this demand has been bolstered by lower New York futures prices (below 80 cents) and the lower world price.
This price movement has allowed mills to maintain their margins, and thus continue spinning operations at a high level. Therefore, the only caution facing mills is the increasing inventory held by retail establishments.
Yet, with certificated stocks declining and the remaining ones likely already sold for export, March needs to climb higher to gain a healthy level of certificated stocks. That could take the March above 85 cents, but not for long. However, New York above 82 cents should be high enough to get stocks coming back to the Board.
This week saw another net of 248,000 RB of Upland export sales, adding more pressure on USDA to increase its estimate of U.S. exports. We must keep a very keen eye on the availability of quality cotton.
Longer term I have turned bearish, but the market must find its way to bridge old crop and new crop futures–as new crop has “lower price” written all over it and the old crop price is telling us it likes the 80 cent trading range just fine.
U.S. plantings in 2014 will be some 500,000 to 750,000 acres higher than in 2013. Most of this increase will occur in Texas as it climbs back to 6 million planted acres.
The Midsouth and Southeast will be little changed, but a 1-2 percent increase would not be surprising. Plantings in 2015 and the out years will increase as the Midsouth and Southeast add 200,000 to 400,000 acres–over and above 2013 plantings–and U.S. production rebounds to 15-17 million bales.
The double edged sword will be lower prices and increased consumption. Some suggest prices will drop into the 60′s, but any life in the 60′s would be very short lived. Of course this scenario comes about as grain and oilseed prices move lower and cotton becomes more and more favorable for many growers. Nevertheless, soybeans will continue to enjoy an edge in 2014–even though that gap is quickly closing.