Cotton prices, basis the New York ICE contracts, continued a volatile pattern all week but remained firmly entrenched within the narrow 62-65 cent trading range. Most of the activity was tethered to 150 points on either side of 63 cents.
The slightly wider range from 61 to 66 cents remains the major trading range. The range will likely remain in force into mid to late May as the planting season approaches its conclusion.
However, given that more than 60 percent of U.S. plantings (Upland) will be in Texas and upwards to half or more of that will be dryland acreage, once plantings are completed, the market will likely be a bit more volatile as mills continue to bet the come line (hand to mouth buying) and forsake price fixing or hedging of any kind.
My thoughts are that they are playing a risky game. As stated last week, this market has 70 cents, basis December, written all over it.
As mills even now scramble to find high quality cotton, they seem to have adopted the strategy that there will be a more-than-ample supply of high quality production in 2015. Hopefully, that will be the situation that develops.
However, with the Midsouth claiming its best crop ever in 2014 in terms of quality as well as in comparison to the quality production in the other regions (the West obviously excluded), the probability of a repeat is most doubtful.
First and foremost, Midsouth plantings are expected to be off 13 percent from 2014, down nearly 400,000 acres. Assuming an 820 pound yield, then Midsouth production would be down over 600,000 bales. Additionally, the abnormally cool June and July experienced in 2014 (daytime temperatures not exceeding 90 degrees) are not forecast for 2015.
So, neither yield nor quality of production can be forecast for 2015.
Yet, the stock of quality U.S. cotton will fail to be replenished and the already difficult tightness in quality stocks around the world will become that much more critical. Further, the Coastal Bend area of Texas is experiencing an increase in grain sorghum plantings at the expense of cotton. This further reduces the potential level of high quality stocks.
It is this very tight quality shortage, that only gets tighter, that will drive the market higher.
Yet, I would be remiss if I did not caution you that ICAC’s April 1 report suggested that prices would move lower in 2015-16, despite the fact that world stocks are moving lower. I have always advised traders to view the ICAC analysis as excellent work and continue to offer that same comment.
Simply, I disagree with their assessment. Yet, that is the driving force for all markets and price risk–differences in opinions.
The USDA March 31 planting intentions report was much as expected with plantings coming in 9.4 million acres of Upland. The report was without surprises. Texas acreage was projected at 5.7 million acres, down 500,000 acres or 8% from 2014. Georgia plantings were estimated at 1.1 million acres, down 280,000 acres, or 20% from 2014.
The export market remains solid as a net of 61,200 bales of Upland were sold the prior week. Export shipments of Upland totaled 325,300 RB. Demand for U.S. cotton remains broad based as some fifteen countries were buyers.
China, Vietnam, Turkey and Indonesia were the major destinations. Vietnam is on pace to import over four million bales this year and has become the third largest importer in the world. That is, it has become a major world player. Most of its expansion has come at the expense of China.
The popular political slogan, stay the course, comes to mind. Cotton prices will move higher led by the demand for quality.