So much for bullish and bearish fundamentals in the cotton market.
The market is whip sawing back and forth within the very narrow three cent range between 62 and 65 cents. The wider trading range of 57-66 cents continues to be in play, but it’s the 62-65 cent channel that contains most of the activity.
Neither the bulls nor the bears have shown any willingness to push trading out of this range. The “aglo” traders, coupled with high frequency traders, account for most of the trading volume (computer trading). Put another way, the ICE futures exchange is making good money, whether the growers or traders are or not.
Growers have been very active pricing physical cotton and/or contracting once prices touch 63.50 cents. Yet, in reality, the market is going nowhere. The computer models are hard at work prodding other models to play out their respective hands. It’s a great trading environment for computer models but leaves the cotton market void of any price discovery. Thus, the market continues to experience wild swings, going nowhere until a futures contract expiration nears and the threat of delivery forces the traders to stop computer trading. Yet, for now and until the October first notice day approaches in another three weeks, trading will continue erratic.
Please feel empowered to comment that I do not know what I am talking about. I wonder myself. Yet, one thing is for sure – the ICE cotton contract is not providing price discovery.
Is any of the above important? It is from the standpoint of saying, “This is not your father’s cotton market.” Most think, as do I sometimes, that those comments are just meant to cover up for the times I misread the market. Simply, it really means that fundamental market indicators are not routinely as important as in the past.
Of course, the ultimate price – whatever that is – will be determined by supply and demand. Yet, the road to that final price now contains hundreds more detours and potholes than ever before.
Remember, the futures exchange itself is “strongly encouraging” more futures trading because the exchange is now a “for profit” company. We all grew up with a non-profit cotton exchange – one that did not encourage trading for the sake of just trading. The exchange, for the most part, no longer exists for price discovery. It is a dividend paying corporation whose business is to make a profit, with little concern about service.
Granted, going into a delivery period, the price discovery service resurfaces and the market functions as in past years. Trading volume used to amount to about 10 times crop size. Now, trading can easily be six to eight times the cotton crop. Thus, market trading is now much less about price discovery than it is about churning contract trading.
Bless the memory of the late Joe O’Neill. He is so needed.
Likely, most of you have little interest in those comments, much less understand them. You want to hear about supply and demand. Okay.
Every analyst agrees that the cotton market should be some 10-15 cents lower than it is – really! However, there is a market axiom about rowing one’s boat in a different direction than all others. Supply is terribly bearish. Demand is even more bearish. Demand even appears to be bearish two to three years out…all the way to 2023-24. Yet, December futures continue to challenge 65 cents – a breakeven or better price for many growers, especially given the three to four plus bale per acre yields that seed varieties now provide.
The U.S. grower is strongly positioned to keep, maintain and even grow the U.S. market share of the world export market given the seed varieties. Brazil is the major competitor and is very formidable, but its transportation and storage infrastructure forces it into some fire sales.
Last week’s litany of bullish and bearish factors did not include comments about increasing gold and silver prices. However, we did tweet such three weeks ago, commenting that higher metals prices would boost commodity prices and would boost cotton prices. However, the price increase also implies longer term lower net revenue for growers due to inflation.
Too, sooner or later the cotton market must address the real world fundamental that world cotton stocks exceed 100 million bales. World consumption during the 2020-21 marketing year (now one week old) is expected to be between 113-115 million bales. Thus, the world already has some 96-100% of the cotton it needs before the world harvest even begins. Too, many world consuming countries already hold stocks larger than their anticipated consumption.
The August 15 meeting between the U.S. and China regarding agricultural and other product trading agreements likely holds some magic news for commodity prices as well. Cotton is as well positioned as any, and better than most, due to sales already made to China. As we have stated for three weeks now, cotton will at best muddle along trying to hold its head above 57 cents. I can find other colors to paint a higher price picture, but all of them seem to contain a heavy tint of rose in them.
Cotton prices are just left to muddle along for now. Demand is the key, and it is weak at best. The Administration is attempting to buy a demand for U.S. agriculture from China. Economics is clear in demonstrating that buying a demand for agricultural production is much less expensive than providing income support for producers. Thus, the strong efforts to ensure the Chinese Phase 1 agreement.
Yet, Chinese action and response appear to be tied to their respective reading of the upcoming election. They show their dismay with the current Administration but become warmer when they fear the current Administration will withstand the election challenge. Yet, the trading record is very clear. The current Administration is the only administration in history to force China to meet its commitments.
The August 12 USDA world supply demand estimates will likely show larger world ending stocks and smaller U.S. ending stocks. The report is expected to be slightly bearish to the market. However, the 57-57.50 cent price support level should hold.
Speculators will likely continue pushing for higher prices, and this activity will give growers another shot at 64 cents, basis December futures. However, price resistance at 65 cents is becoming stronger and stronger.
Give a gift of cotton today.
Dr. O.A. Cleveland is professor emeritus, Agricultural Economics at Mississippi State University.
