Cotton Marketing Weekly



March 9, 2018

Cotton—The Fiber of Choice

Cotton captured the attention of commodity speculative funds all week as USDA reports were bullish to neutral and prices returned to the prior month’s highs, posted new highs, and triggered technical signals of yet higher prices. However, we must caution that prices have moved only about a cent above where the market failed on its last leg up. Presently, the fundamentals of supply and demand offer a brighter outlook than six weeks ago, but open interest, while increasing, has been a bit slow to regain the level typically seen in a roaring bull market. Holding the 85 cent level for now is critical for pushing into the high 80’s. If exports continue to hold, and I think they will, the old crop contracts will challenge the 90 cent mark. The bulls are increasingly aggressive as on-call sales also are pressuring the market higher. Too, that will along with dry weather in the Southwest, will push the new crop December contract above 80 cents. Weather will determine the extent of the rally.

Nevertheless, I remain resolute in suggesting that growers fix the price of at least as much as 30-35 percent of their 2018 crop now that December is above 78 cents. Granted, my initial pricing recommendations have been a bit early the past two years, but the current price level offers profitable returns to all growers. The objective for December is 85 cents. Yet, new crop is a weather market and can be 10-15 cents higher or 10-15 cents lower. Yet, new crop has the fundamental of demand on its side. Therefore, the 72-73 cent area, only 5 cents lower should provide excellent support even in the face May rains in Texas.

Let me remind you: IF you like the price enough to plant it, then like the price enough to sell some.

Demand continues to be the big engine behind the market’s push higher. Typical demand factors include a change in consumers taste and preferences (a switch from the acid based crude oil polyester as well as the desire for a pollution free fiber). The price competition between polyester and cotton has shifted toward. This was led by China cracking down on polyester manufacturing facilities because of water and air pollution. Additionally, consumers are again expressing a desire to return to the comfort offered by cotton. Demand should support the price of raw cotton in mid 70’s and 80’s.

We have discussed the onslaught of improving export sales and shipments. The past week established a near lifetime record of weekly sales and shipments. More such weeks will be forthcoming. The Australian and Brazilian crops are essentially sold out and Indian export sales are delayed and limited. Thus, the demand for U.S. cotton, already one of the cheaper growths in the world, will do nothing but explode. Exports in 2018-19 will also see a similar pattern.

The market faces a number of reports during March. The Chinese National Reserve auction begins March 12. That auction needs to continue along the smooth path it carved the past two years to insure that the demand for U.S. cotton remains strong. The March Plantings Intentions Report (March 29) is the other major report. Additionally, the weekly export sales report and the weekly CFTC On-Call Report will be watched be watched with keen interest. The tariff question is not particularly important to cotton’s bottom line. A counter cyclical tariff on cotton by Turkey could disrupt some established trade flows, but the critical shortage of U.S. quality cotton (this year and next) would mean that the solid Turkish market honed out by U.S. merchants and cooperatives would shift to other export locations and U.S. export volume would not be hurt. Simply, Turkey would end up paying more for cotton than they currently do.

The USDA March world supply demand report proved to be all but meaningless in that it did not address the Indian cotton situation. By the end of the year U.S. stocks will fall below 5 million bales, world stocks will be near or below 87 million bales, U.S domestic consumption will increase ever so marginally and U.S. exports will rise well above 15 million bales. The world will experience its third consecutive annual reduction in cotton stocks. Again, while I second guess USDA, they operate with very limited resources and a short staff. Yet, it is well past time to get a defendable data base for the world largest producing country, India, if they wish to be taken seriously. Most every serious world cotton analyst, if not all, are in agreement.

Finally, as to the outlook for cotton prices, I am reminded of the ole cotton adage, “You are just like cotton, You always give more than you promise.” This week at least two independent sources suggested cotton prices would likely move above 90 cents. I will not have any left if so, well maybe one bale, but just one.

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