By Jeff Thompson, Autauga Quality Cotton Association Manager
The U.S. cotton producer received another brutal blow last week. No, it wasnΆt the passing of Prince, which seems to have stopped the entire civilized world in its tracks, but rather an ill-timed decision by USDA to adjust the calculation used to determine LDP and POP payments.
By adjusting the “Far East Transportation Costs,” a component of this calculation, by 2.02 cents, it reduced the LDP/POP by the same amount. Such adjustments are not unprecedented, but the timing has made this one more damaging. This action results in an immediate reduction of remaining equity for cotton being held in loan by producers and cooperatives.
Even though industry leadership is actively seeking remedies, itΆs a tough pill to swallow in a year when marketing loan gains play such a key role in pricing.
This is just one of several blows cotton producers have taken in the past few years. If you will allow me the use of another simile, itΆs reminiscent of Rocky BalboaΆs epic fight with Apollo Creed.
U.S. cotton producers, like Rocky, fearless and unrelenting have taken on a flurry of punches round after round despite overwhelming odds. Blows have come in the form of a failed Farm Bill, plummeting prices, escalating costs, uncertainty over foreign Ag policy and man-made fiber competition. Bloodied and bruised, we look toward our corner to industry leadership for help in defending these punches as well as ways to deliver some of our own.
Though itΆs likely to be a painful 15 rounder, I have no doubt working in concert we can prevail. As so many times before, it will be the steadfast strength, determination and fortitude of the U.S. cotton producer that yields success.
Market Briefs
In our report two weeks ago, we questioned the staying power of this market. As the price rally continues, weΆre still hesitant to call it the beginning of a bull market, but there are signs of it gathering further momentum. Closing yesterday at 64.04, the July contract has tacked on 6.5 cents in the past four weeks. The new crop December contract has followed suit settling today at 62.72, gaining slightly over 5 cents in the same period.
Our hesitancy lies in the fact that the stimulus for this advance appears to be more a response to the macroeconomic environment rather than cotton fundamentals. History has shown no bull market is sustainable without strong demand and therein lies our weakness.
A recent Bloomberg article cited the Chinese investorsΆ newfound love for commodities. All types, including cotton, have been largely responsible for the recent resurgence in global commodity prices. As the worldΆs biggest user of commodities, a rise in credit liquidity has stimulated their buying.
With this action, one would assume the Chinese are either bullish on the world economy or bearish on inflation. In any event, the greatest concern must be market volatility if credit tightens once again.
Fundamentally, there are some positive signs on the horizon that can and have provided market support. For the past two weeks export sales have been rather disappointing, averaging around only 100,000 bales a week. Though negative at first glance, promising is the absence of a selloff in the market which is further evidence of newfound support.
Also, with China a major buyer, itΆs an indication U.S. exports to this country may be greater than once predicted as global supplies of quality cotton tighten. In closing, the April WASDE report had 2015 production numbers for India and Pakistan down considerably. This is significant, for they are major competitors of ours in the world export market.
