Cotton Market Weekly
Dr. O.A. Cleveland
Cotton Marketing Analyst, Professor Emeritus, Mississippi State University
December 14, 2018
So the Hunt brothers tried to corner the silver market and Ned Cook knew he had the corned the soybean market. Both had the fundamentals down pat and were absolutely correct. Their trades were a cinch for huge profit. Their analysis was correct. The problem was that both ran out of margin call funds before their trading strategy proved to be correct. Both took massive loses and even a bankruptcy. As deep as their pockets were, they were forced out of the market and to the sidelines with the knowledge that their respective strategies were perfect, but their pocketbooks thin. Market timing is what the futures market is all about anyway. So goes the cotton market and U.S.-Chinese tariff war. A near term end to the trade war and the U.S. will be an easy winner. A long protracted riff with the Chinese and U.S. agriculture, particularly cotton growers, will be big losers. Actually, the tariff was a great idea, but once cotton had to face a tariff, the U.S. government trade office forgot to impose a similar tariff on imported textile and apparel goods coming in from China. Thus, while the Chinese imposed a tariff on U.S. cotton, essentially preventing U.S cotton from being imported into China, China imported other foreign produced cotton, spun the yarn, manufactured the goods, and exported billions of dollars of apparel and textile goods to the U.S. duty free. If effect the U.S. became a huge importer of foreign produced cotton. Thus, the Chinese circumvented part of the U.S. tariff related to agricultural goods and left the U.S. farmer eating their dust. That is, the U.S. trade office and its inexperienced management sold out the U.S. cotton industry and cotton growers to the Chinese government. Simply, the U.S. forgot to tariff Chinese apparel and textile goods. Thus, the Chinese have no incentive to lift their tariff on agricultural goods. Possibly, the tariff is working for non-agricultural goods, but for agriculture official Washington seems to say, “Who cares about the farmer?” So how long will be tariff war linger and why have there not been any real sales of cotton or any other agricultural products during this current 90 day “cooling off” period? Thus, the market is set to remain locked its wide seven cent trading range (75-82 cents). We get excited at the 80-81 cent trade, only to have the door slammed on price advance. Cotton is almost becoming a dead market despite its seemingly playful attitude around the 80-81 cent range. It seems to be it is the train that’s not going anywhere. The trading range is locked in place because of the tariff.
Nevertheless, the decline in world production and the ever declining level of world stocks have the market poised for higher prices. One thing is certain, the market will break out of the current price range. Will it move higher or lower? One can choose sides, but whichever way it goes, we should see a 5 to 8 cent move. Yet, will the tariff be lifted while there is a chance to sell cotton overseas? The clock is ticking on that and its way past halftime.
We have noted for several weeks that Indian production had to be lowered another two or three million bales, a huge amount. USDA took a million off their estimate in this week’s supply demand report, but at least another million will have to come off. India is expected to have to import U.S. cotton. Pakistan stands to face trouble as well. It has made a major purchases from India and India is highly prone to cancel all export sales when their crop is short. In reality, India may have the smallest crop it has had in ten years. If this come to pass the entire export market will be in an uproar and prices will scale higher, despite the tariff. Almost like the lyric from West Side Story, “Got a rocket in my pocket,” could apply to cotton prices. While cotton prices have been in a six to seven cent trading range for over three months, the feel of a rocket in its pocket is surfacing. Certainly no fuse is sparking, but the fuse in is. Consumption may be slipping, partly because of the Turkish credit/cash problem. The combination of the loss of the Chinese market, coupled with the troubled Turkish economy (Turkey has historically been one of the two largest users of U.S. cotton) can still spell doom for U.S. exports. Should these come to transpire then the rocket fuse fizzles and cotton prices challenge the 75 cent support level again. My personal analysis takes prices higher, but the tariff has become little more than a crap shoot. Do some pricing at 80 cents. However, recaps without high quality will suffer a basis loss as will those will staple below 37.
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