You are familiar with the 3 main factors regarding the value of real estate: Location, Location and finally Location. Bulls are thrashing about in the cotton industry…and it is all about the three main factors affecting the current price of cotton; Quality, Quality and finally Quality. Longer term, the 3 main issues are also quality, quality and quality. Look at what is happening in the world cotton industry.
Led by the demand for quality cotton prices climbed to a 5-month high this week. More so than being led by New York the price rally was based on the firmness in Indian prices as well as an expressed desire by Chinese mills for machine picked quality cotton. With the U.S. supply running low and strong sales continuing to be made to China, the rally is suggesting price rationing is now occurring.
Granted, I had expressed 6 weeks ago that the market would likely fail at 85 cents, but I did lay out the possibility that the tightness in world quality could push prices to the 88 cent level—I just did not expect it. Likewise, I do not feel the market is in for clear sailing now as most likely it will want to test 82-83 cents another time or two.
Yet, it is clear that demand can push prices higher before the 2013-14 marketing year concludes (August 1). Nevertheless, I remain firm that the majority of old crop cotton should be priced at this 87-88 level. This could be the limit for now as the 88-89 cent barrier should be stiff. Yet, I must remember the third most important fact affecting near term prices. As was also stated 6 weeks ago, the market scenario remains bullish for old crop prices, but bearish for new crop prices.
Yet, the world price has now inched back above 90 cents after falling into the high 80′s. Rather than New York leading the way to higher prices this week, the rally was primarily influenced by the firmness in Indian prices as well as the desire by Chinese mills to import good quality machine picked cotton. Export sales were impressive this week. Too, a good number in the cotton industry appeared to join the bandwagon of our long held belief that China will not dump cotton on the world market. It simply would be counterproductive to all their past efforts in supporting the domestic price paid to Chinese growers.
Yet, it remains the demand from China that has pulled Indian prices higher and higher the past two months. The entire market dynamics have changed as ChinaΆs demand pulled Indian prices up to, and in some instances, above U.S. prices.
Just three weeks ago China was purchasing far more Indian than U.S. cotton. It was more readily available and much less expensive. Yet, now U.S. and Indian prices are near equal, and the world is somewhat generally indifferent between the growths. Yet, since the Indian domestic textile industry is on track to surpass Chinese consumption, the domestic price of the Indian crop is also escalating. In fact, India is buying quality cotton from West Africa at a lower price than the same grades of Indian cotton can be purchased in India.
These quality issues are not going away during the current marketing season…March, May and July contracts. There are some down days coming, but for now the quality supply demand imbalance will pressure old crop higher.
