By O.A. Cleveland, Professor Emeritus, Mississippi State University
The cotton market ended a bullish week and month on a high note as the December ICE contract pulled above 74 cents on the weekly settlement. Funds drove the market higher, coupled with an assist from Mother Nature’s continued shun of the giant acreage on the Texas plains. Demand helped the cause as U.S. export sales continued to exceed the expectations of most with sales and shipments made to 24 countries on the week.
The 71-75 cent trading range continues to dominate trading, basis December. Nevertheless, the market has yet to churn out a trade above 76 cents which would almost certainly catapult the December contract to a trade of the life of contract high just above the 80 cent mark.
The marketΆs backdrop continues to be dominated with weather concerns around the globe, but there have been some local showers in Texas that have been helpful and the cotton area in India has been blessed compared to a week ago. Yet, as of a week ago Indian plantings were some 2.5 million acres behind last yearΆs drought reduced plantings. However, the market is unquestionably bullish as evidenced by the continued strong demand by Chinese mills for the state owned Reserve stocks.
Yet, in the face of that, I am strongly of the opinion that growers should move their price fixations up to between 40% and 50% of their entire anticipated production. In fact, I favor being 50% priced at this juncture.
The call for 25% to 33% went out just last week so why am I so quick to add to price fixations?
- The technicals remain bullish.
- Prices have had a significant increase.
- A new trading range has been established.
- Chinese domestic prices are well above the Reserve minimum price.
- The Texas plains are within some 2 weeks of a disaster with little help in the forecast.
- Indian prices remain near yearly highs and global export sales are good as world stocks are being worked lower.
- Well, the reason I give in one word is—Marketing. Think about the orderly marketing of the crop. Many have been hoping for 3 years and now the market is offering a profit, albeit slim for some. The market is hungry. It is rising because it wants cotton. It wants to be fed. Feed it, sell it some cotton. For years I have said “feed a hungry a market.” Well, it is time. So, the markets goes to 85 cents—donΆt count on it, but letΆs say it does. Great! You still have 50% of your crop to sell and you had a good winterΆs sleep knowing you sold in the 74-75 cent range.
The market has spent the last 2 weeks consolidating its new price range. Managed money has flooded the market, reaching near its all-time high investment in the cotton market. How much is left? Okay, there is some more speculative money out there as cotton is the darling of the speculators now, but… Basis the December ICE contract, prices were up 987 points in July, or nearly 15.5%. Yet, there were a couple of chinks that showed up in cottonΆs armor this week.
Chinese Reserve sales, after more than 3 weeks of sales accounting for 100% of everything offered, a few bales, just a few mind you, failed to move at weekΆs end and local prices fell as well. Does this signal a trend change? I do not know, but the market has been very hungry the past 3 months as the Reserve has sold 7.5 million bales in that short time period. The target was to sell 8 million bales in four months, May thru August. However, the sales have been so significant that the government announced it would keep the auction open another month (September) and now sales could climb to 10 million bales. Chinese mills have purchased about 60% of the Reserve sales while Chinese “traders” have bought some 40%. The unknown at this point is–what the intentions of the “traders” are. They have a profit made at current prices. Will they offer the cotton for export? That is not expected, but then who knows?
China has given us another major unexpected this year, the textile expansion occurring in Xinjiang. The industrial city of Aksu just reported an investment of over $440 million spent in the most recent 6 month period for new spindles and fixed textile investment. That was a 133% increase from the prior period. The plan is to expand the current 2 million spindles to some 4.5 million by 2018. This demand expansion was unexpected and has had a significant influence in the increased demand for cotton.
While cotton is enjoying an immediate uptick in demand, the new higher price range will pressure that demand. The casual apparel market, now dominated by the chemical acid and oil based fiber sold to most college sports fans and golf shops, continues to “clean cottonΆs plow” so to speak. CottonΆs share of the fiber market continues its several year free fall and 80 cent cotton will drive more spinners away from cotton until consumer attitudes once again recognize cotton as the fiber of their life.
Feed this hungry market now, but without moisture in Texas in the next 2 weeks a production disaster is on the horizon.
