Several factors influenced the sharp increase in cotton prices over the past week. Among them:
An unexpected reductions to US and China production estimates on the USDA WASDE release on Monday, August 12.
Weather concerns within China and the US.
The net effect of the WASDE report was to reduce US carryout for 2013/14 to 2,8M bales by virtue of an approximate 500K reduction in production and a very unexpected reduction in 2012/13 carryout via USDA-FSA cotton warehouse data. World carryout still is projected to be at a record high at the end of 2013/14, at 93.77M bales.
However, 58.26M of those stocks are currently projected to be sequestered within China. Subtracting the projected China carryout and consumption of this MY would still provide a world stocks-to-use ratio in the remainder of the world of approximately 48%, which should be no cause for alarm, except for current northern hemisphere 2013/14 production concerns due to weather and approximately 11M – 12M bales of production listed in the balance sheet for southern hemisphere entities.
These countries have yet to plant the crop already placed within the USDA balance sheet, which is another source of uncertainty, especially for Brazil, give the current level of grain prices.
The US crop and associated carryout is generally considered to be the largest driver of prices associated with ICE cotton futures contracts, and it was perhaps uncertainty within the trade as to how to weigh beneficial rains in Texas against continued wet and cool weather in the Southeast US, and to a lesser extent the Midsouth (particularly the north Delta) that seemingly stalled prices during mid-week.
However, a weather report for heavy rains in the coming days in the southeast quadrant of the nation tipped the scales in favor of the bulls on Friday.
We had expected that demand rationing would become evident via the lackluster 38.5K running bales (RBS) of new sales reported on Thursday, the 56K-plus RBS of cancellations to date in the new MY, the nearly flat sales against Dec 13 (reported via CFTC) and the expectation of further lackluster export reports in the near future.
And, it is not to say that we have not seen, or even realized such, but rather it seems that sales by producers against Dec 13 (approximately 1.5M bales) are not being fixed as the market climbs higher, and to exacerbate the problem, most merchants are purchasing new crop base to Mar 14.
Considering these factors and the heavy, net long position of non-commercial entities (speculative funds) a significant correction in the near future for Dec 13 may only be spurred by the decision of these funds to take profits. Lack of fixations by producers is inferred by to exacerbate crop concerns via producer uncertainty about their new crop.
Louis W. Rose IV, PhD, MBA, grew up on a cotton farm in northeast Arkansas and has been involved in cotton his entire life – starting in his familyΆs fields, then as an Extension scout while attending the University of Arkansas and later as a crop consultant, operating his own firm before transitioning into a career as an agricultural analyst in 2000. He is a former Global Cotton Analyst with Cargill Cotton where he developed predictive statistical models for the firm. Rose currently provides analytical services. Contact: info@rosereport.com.
