It is always the darkest before the dawn. Old crop cotton futures are working overtime to establish the 77-78 cent area as the price bottom.
This week’s trading pushed prices down to an 18-month low as technical fund traders dumped volume after volume of sell orders every day. They pushed prices down for seven consecutive days before letting the market come up for air.
The difficult times remain front and center for the cotton grower, but bearish news is filtering out and explaining some of the current week’s activity. Textile mills, both in the U.S. and overseas, made announcements of temporary shutdowns between now and the Christmas holidays. Some mills will close for only a week and others will shut down for as much as a month. Still others will go to short work weeks. Either way, mills plan to reduce inventory of yarn stocks which has simply become far too burdensome. Should the lows established this week fail to hold, then the next line of price support is down another two cents, sitting at 74-75 cents.
Yet, demand is showing signs of turning, ever so slightly. The market began to uncover demand once it fell within the 79-81 cent trading range as indicated by the weekly export sales report. The very slight increase in export sales (and to be sure, the increase was slight) did find mills making overnight inquiries for cotton. Even inquiries that do not result in sales are positive given the present demand situation.
Too, it was very encouraging to note that the new crop December 2023 contract held very firmly at 75 cents despite the old crop December contract drifting lower. This is not to claim that December is ready to now move higher. It is not. However, the futures contract is clearly signaling that cotton is underpriced and longer term must move higher.
This is not to suggest that prices will turn around this week or even next month. Likely, the market will not cycle higher until January-February, and the initial response will be slow, very methodical, and a bit limited. Likewise, the new crop December should begin a move to higher prices by February, just before Southeast and Mid-South growers settle on their “final” cropping plans.
We continue to suggest 2023 U.S. cotton plantings to be between 9.0 and 10.0 million acres, with a point estimate of 9.6 million. Rotation patterns could push plantings slightly higher, while wheat prices could cause acreage to fall just below the 9.6-million-acre estimate. Both the cotton/corn price ratio and the cotton/soybean price ratio will allow grains and oilseeds to take acreage from cotton in 2023.
However, as growers always do, they will overshoot their response to the changing price ratios, and the outcome will be that cotton prices will ease higher after the June/July planting in the U.S. Southwest. We will see a very slow grind higher. The business world is battered, bruised, and even very bloody. Old crop prices should return to the 80s, but not until March or April.
Growers know far better than I, but weather could also bring about a significant shift in plantings. Mother Nature is still looking at a La Nina weather pattern that would portend another dry season facing the High Plains and Rolling Plains of the Southwest.
Weekly export sales and shipments were slightly improved over last week, as they should have been, as mills responded to lower prices by being a bit more aggressive in buying cotton. Net sales of upland totaled 84,500 bales, while shipments of upland totaled 165,700 bales. Both numbers were lower than what a typically active market would merit but were better than the prior week as well as the prior monthly averages. Sales were made to 12 countries with Pakistan, Egypt, and China being the primary buyers.
Again, the export market was sightly more aggressive, but it still clearly indicates significant problems in the U.S. and world economies. Nevertheless, this week’s export business, coupled with the continued mill price fixations on the December 2022 futures contract, suggests mills are doing “bottom picking” on prices – as they should be.
The market will also find support in on-call mill sales. It is too early to declare the sales as bullish, but the sales are supportive. The March, May, and July on-call sales total 4,422,600 bales versus only 512,900 bales of on-call purchases. This nearly 10 to 1 ratio of buying futures versus selling futures will provide underpinning for prices and will give any rally in the December 2023 contract a slight boost.
We will have to keep the bandages on a bit longer, but they will be coming off.
Growers may wish to consider buying a call option once the price of the physical cotton is fixed. Consider buying the 4-cent or 5-cent out of the money July call. One will probably have to go out to July to give the market time to cover the premium cost and allow for a slight return on the call option.
Give a gift of cotton today.
Dr. O.A. Cleveland is professor emeritus, Agricultural Economics at Mississippi State University.
Πηγή: Cotton Grower