Thompson on Cotton: Is Global Consumption on the Rise?

    Cotton bales in gin warehouse. ©Debra L Ferguson Stock Images

    I guess there are two things one should never try to predict, the weather in West Texas and USDA’s supply and demand estimates. In last week’s commentary, you recall I said don’t look for any surprises in their upcoming report because October’s is historically uneventful. Was I ever wrong!

    Fortunately for everyone it was a positive adjustment and the market reacted quite favorable to the changes. Current crop cotton futures gained 359 points for the week to close above that ever elusive 70 cent level at 70.57. To our pleasure, it has begun this week where it left off settling yesterday, at 71.19, a gain of 62 points.

    By now you’ve probably seen and read the numbers several times so I’m not going to bore you with those; the long and short of it is both domestic and world ending stocks were lowered. At home, a long awaited increase in our exports was reflected along with an unexpected slight decrease in production. In turn, this bullishly lowered our ending stocks by ½ million bales to 4.3 million.

    Certainly good news and better yet there is a very good chance U.S. exports could increase even further as we will discuss later.

    The biggest adjustment concerned the world numbers and how it was derived raises even more questions. Global ending stocks were lowered by almost 2.5 million bales to 87.3, the lowest level since 2011.

    This was largely due to USDA correcting numbers on the front when they reduced beginning stocks in China by 2 million bales. This change does bode the question as to why. Could it have been a correction to account for better than estimated consumption, a discounting of held stocks for quality losses, or done simply to true up the math, time will tell.

    In addition, mill use in Bangladesh and Indonesia were revised upward while trade relations between India and Pakistan, the world’s third largest importer of cotton, continue to worsen. All of which should make the U.S. a preferred customer.

    Personally, we feel it is indication world consumption is on the rise just as China’s successful auctioning of 12 million bales would indicate. Even though some would say a large portion of this may be in the hands of traders rather than the market, we would disagree for its unlikely they would want to get themselves in this position again.

    Another sign of increasing demand, but somewhat overlooked last week, was our U.S. export report that showed 226,900 bales were sold during the week, up 55 percent from the previous 4 week average.

    Keep in mind we only need to sell 142,000 bales a week to match USDA’s current export estimate.

    Shipments were down slightly at 152,100 bales, but most likely due to a timing issue with little quality cotton yet in the pipelines. All this considered, we remain cautiously optimistic there is support for prices at current levels.

    Don’t expect a return to the high 70’s, at least in the short term, for harvest pressure will certainly be a factor. However, this latest advance could have a couple of more cents left in it.

    This week’s export report will tell us whether this price rally has scared mills into fixing purchases or whether they will continue to play the game of Pong. In any case, we are moving in the right direction over the long haul with these improving fundamentals.

    However, we must always stay alert to factors outside of fundamentals and the unexpected consequences they can have on market prices. In addition, to projected interest rate hikes, global economic uncertainties, our greatest nearby threat is the potential actions of the spec community.

    An ever possible exit from their historically large long position could significantly depress prices in the short term. However, if mills are encouraged to fix on call purchases it could provide cover for some spec reversal minimizing any sell off.

    Cotton Commentary

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    At the risk of sounding exuberantly optimistic, imagine how bullish it would be if specs had additional ammo by shorting then going long again at current price levels. It never hurts to think half full rather than half empty.

    In closing, once again a pricing opportunity has been given to those with cotton unpriced. For those selling on recaps, be aware the sales basis is 100 to 150 points weaker than in previous years, with the exception of high grades.

    Early grades are giving us some concern as we are seeing shorter staple and lower uniformity than expected throughout the Southeast. I’m never one to discount a crop on early grades so we will see if this improves as we get into the bulk of the harvest.

    In any case, call us at Choice Cotton if we can assist you with marketing your recaps. Also, we have contracts available for the 2017 crop. With new crop prices above 70 cents, one would be wise to begin looking ahead to next year. Call our office if you would like to further discuss the terms of these contracts.

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