The cotton market was a bit battered this week as the old crop July contract took the new crop December down with it. Yet, the market is best represented as a buying opportunity for textile mills rather than anything else. The market must now entertain the possibility of depending on the price support near the 78 cent level, but in reality, it is expected to hold above 80, basis the December contract.
As was the case in 2012, the drier it got in West Texas the lower the market went. Yet, a similar case is not on tap for this year. The principal difference is the lack of cotton available for textile use between now and October-November 2013 when the new crop will become somewhat available. The bulk of the new crop supply will not be available until December.
Despite the good demand that has been generated by the lower prices of the past two weeks, prices have continued to slip. Mill fixations have been large and physical business, particularly West African and Australian, has been extremely active. Additionally, some Indian cotton has been exported. While U.S. sales have slowed on a seasonal basis only, there is little U.S. quality cotton available for export. This weekΆs U.S. sales pushed total sales above the USDA estimate and there remains another six more reporting weeks in the marketing season. Sales to China remain very active.
Some have suggested that the Chinese release of reserve stocks has forced the market lower. Certainly that is part of the picture. Yet, most of the Chinese sales to local mills were imported U.S. cotton that had previously been sold to the Chinese government. All of that cotton is typically taken up immediately when offered.
Additionally, with the nearby July slipping to 80 cents it again becomes feasible and desirable for Chinese mills to import U.S. cotton directly, pay the import and assorted fees and penalties, and still land cotton cheaper than they can purchase it directly from the Chinese government. All signals point to a very healthy appetite by the Chinese textile mills. Too, given the obvious upgrade in apparel goods required by U.S. retailers, Chinese mills are increasingly requiring more and more quality cotton, i.e., more imported cotton whether it is from immediate purchases or from imported cotton already in the reserve system. Either way, the bulk of the quality cotton continues to be consumed on a daily basis and will work to strengthen the basis of cotton that remains on the market.
In one sense the market is at a teetering point, but then quality stocks are low and it only continues to get hotter and drier in the Southwestern U.S. The market is well supported. Growers will get other opportunities to market for a higher price.
