Cleveland On Cotton: 75 Cents Is Now Doable

    The Bayside Gin in Texas took a hit from Harvey.

    A crisis is brewing…

    Quality is disappearing. Inventory in consuming countries is low. The U.S. – expected to account for 40% of the world’s exports – is scrambling to find cotton for delivery between now and October 1, much less between now and November 1. Certificated stocks have disappeared.

    Bottom line: In spite of a 20-million-bale impending harvest in the U.S., there is not any volume of cotton available for delivery and there will only be scant supplies available between now and mid October.

    Then, there are storms and predictions of storms, and cool weather and wet weather everywhere – and an early frost on the High Plains. The cotton production world has turned upside down. The market is moving higher, but will have some stumbles.

    Yet, how high will it go before there is a stumble? Actually, it seems too high already. World textile mills will continue to hold their current share of cotton usage at least until December climbs to 77 cents. However, quoting my father and likely yours too, cotton is “tighter than Dick’s hatband.”

    Hurricane Harvey took a bigger bite out of the U.S. cotton crop than expected and the verdict remains out whether the greater loss will be to quality or quantity. Most accept a 400,000-bale quantity loss, owing to the normal field storage at harvest, coupled with the rushed harvest to beat the rain, thereby preserving quality.

    Yet, the hurricane winds blew essentially all of that away as well. The Coastal Bend crop, off to a near record yield and quality harvest, is no more. The 21-2’s and 31-3’s are all blowing in the wind. The loss could escalate to 500,000 bales.

    Nevertheless, the U.S. is still looking at a 20-plus-million bale crop, given conditions as of September 1. But a number of factors kept the speculative funds in the market on the long side all week. These factors include:

    • The importance of quality, coupled with the three-day holiday weekend.
    • Hurricane Irma taking aim for the near 5-million-bale Southeast crop or the 4-million-bale Midsouth crop – or possibly even both.

    The funds, unsure of the upcoming week’s weather, either turned buyers or backed out of the market altogether this week. The algorithmic traders took a pass on trading due to the combination of fundamental uncertainties. These actions allowed the December ICE contract to move back above its August high, in spite of the still looming big U.S. crop.

    The absence of sellers, coupled with the crop facing the vagaries of Mother Nature, are on the verge of pushing December above the important 72-cent price resistance barrier which would open up a potential run to 75 cents. As unlikely as such a price explosion is, it cannot be discounted.

    Yet, given the progress of the world crop outside the U.S., and the 20 million plus U.S. crop still in the field, an unwanted trip back into the high sixties will likely be in front of the price parade. However, all this cool wet weather has likely started a fire that will burn for two to three more years as the world’s supply/demand balance sheet morphs into something no one could have expected.

    Cotton Commentary

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    Chinese Reserve sales are fully subscribed, while Indian merchants are buying cotton as rapidly as they can for December delivery. There are 90 million bales of cotton in the world, according to USDA. But the market is acting like we are potentially running out. Hurricanes are always overblown in the market. In fact, the market always tends to overreact and then makes corrections.

    Still, there is something about this one that is not playing by the historical rules. You smart folks will have to figure this one out.

    The Indian crop continues to draw significant rainfall in the areas that were deficient. Plantings continues (late for most countries, but on time in India) and all states have received adequate to more than adequate moisture. The crop will improve, as forecasted by USDA. And as indicated, local merchants are scrambling to get their hands on it.

    Last week I was out on a limb suggesting that the Chinese National Reserve stocks would drop to 26.5 million bales at the end of this year’s sale period. Now it appears that stocks will fall to some 25.5 million bales. More importantly, that means the near 10-year discussion concerning the massive buildup of Chinese stocks will shortly give way to a discussion of why some 75% of the variation in world cotton price will be based on the level of Chinese imports. Demand is glorious.

    Mother Nature continues to demonstrate her dominance over the market. The 65-cent level will host the bottom of the trading range, but we are moving to a wider 10-cent trading and recognizing that 75 cents is now doable.

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