The Big Bear. Why can’t things be prettier? Because it’s cotton, it’s economics, it’s markets, it’s interpersonal comparisons, it’s emotions – and, like everything else, it’s China.
This is August and, if true to form, the cotton market should be listless, dull and quiet. It’s supposed to be the Dog Days of Summer. Not this year.
The market is portraying a sense of popping wide open. Some have it going to 74-75 cents. Two different people from two different continents made that comment to me this past week. Yet, most others have prices slipping back some 6-10 cents.
I remain a BEAR, and I don’t like it. It is unusual for me, so I do hope I have misled myself. Yet, something is keeping prices in this 61-65 cent price range in spite of the very bearish fundamental picture. There are some six to eight other cotton growths that are cheaper than U.S. cotton, and it is those growths that are selling around the world. Thus, the outlook for U.S. export sales is dim. The U.S. – by far the world’s leading cotton exporter – is not the least bit competitive.
I have harped and harped about the amount of cotton held by other world exporting and world importing countries available this year. Yet, the current 61-65 cent trading range has held and appears to be set as the September 11 USDA world supply demand report nears.
So why my double talk about 75 cents, or 65 cents or even 6-10 cents lower? Finally, this ole dumb economist has realized that the New York ICE has abdicated its role of price discovery for the world cotton market. New York futures prices are reflecting conditions in the U.S. The world price discovery role of ICE has been self-shattered.
The ICE contract continues to provide price discovery for U.S. cotton, as long as the market participants “think or assume” that China will make another one or two big purchases of U.S. cotton. The rest of the world is buying and selling non-U.S. cotton on a more or less cash-based system that trades some 6 to 10 cents lower.
The Chinese have been keen at buying in their cotton (buying futures) on ICE when prices are near or below 62 cents. They ride the market higher and sell the futures for a profit. When the market falls, they buy sales contracts for future import. The net effect is to let the futures market profit help pay for the purchases. At the same time, they continue to purchase the very same quality (and sometimes better) Brazilian or Argentinean or West African for as much as 10 cents lower than the U.S. quote.
Too, very large blocks of Indian cotton have moved in the world market. Currently, the Indian policy is to sell inventory at whatever the price is or just a few points lower, if necessary, to secure the sale. Therefore, all other countries’ sales are based on simply selling so as to ensure that they will not incur the cost of carrying cotton into 2021.
The point is, cotton is moving. Just not much of it is U.S. cotton.
Of course, U.S. cotton is moving to China. Both sales and shipments to China continue. Granted, it is refreshing to see that exports to China have been good. However, China does not need cotton. It is a very limited market. Its cotton purchases have been based on maintaining a good image with the U.S. as China does need U.S. grain products for both human and animal consumption. China’s needs of U.S. grain and oilseed should be spelled with a capital N. It is just that U.S. cotton exports to other countries are slowing. This is not to say that U.S. cotton will not sell. It does. It’s just expensive.
World textile mills, as implied by the On-Call sales/purchases reports – and confirmed by merchants and cooperatives – have purchased via on-call contracts. Thus, mills have the right to fix the price of export purchases at a later date. The implication is that mills expect a decline in prices. Therefore, a pricing standoff has emerged. Growers are expecting higher prices and have forward priced/hedged a smaller amount of cotton than I ever recall. Thus, the standoff.
Actually, the standoff is not that unusual. Rather, this year’s volume of unpriced cotton is unprecedented. With the China trade package supporting U.S. cotton prices at an abnormally high level compared to non-U.S. cotton, coupled with foreign exportable supplies at a record high, the world market is reflecting the aforementioned 6-10 cent selloff.
The immediate caution in the market is based on the two hurricanes bearing down on the crop. The Alabama-Mississippi border is expected to get hit mid-week, as well as another storm coming into Texas. Add to that a third storm making its way across the Atlantic, and the market is buffering to challenge 66 cents.
While some Texas growers see a total crop failure, others are reporting a four to five bale crop in the field. Too, the Mid-South crop appears to be improving, and the USDA August report already estimated record yields there. Most analysts are expecting a larger crop estimate in the September report. Yet, a few more hurricanes and crop problems have to come and go before bagging and ties can be put around the crop.
Whatever happened to cotton demand? Maybe its decline was associated with research like the HIGG index. The index – essentially an oil-funded publicity stunt – has proclaimed polyester the world’s most sustainable fiber. It should have been labeled the world’s most unsustainable fiber. Of course, your college and university athletic departments continue to inundate you with this stunt via their support of polyester (i.e. money in their pockets). That same polyester appears associated with Nike and Adidas in support of the Chinese child labor, slave labor and concentration camps.
When will universities learn? When will those opposed to China’s slave labor, child labor and concentration camp textile mills learn? Universities dress their athletics in acid-based fossil fuel products, cover them from head to toe with a product whose manufacturing has caused unknown environmental hazards – and wonder why people become ill.
Give a gift of cotton today.
