Cleveland on Cotton: Market Correction Phase Ends with Bull Back at the Trough

    The Cotton Bull continues his run and is eating at the trough again. First moving above 116 cents and then falling back just below 105 cents, prices have traded limit up on two separate days, but have returned to the 107-cent area. Excellent price support exists in the 104-105 cent range and the market appears to be regaining its strength for another test of the 116-cent high and an attempt to challenge the 120-125 cent level.

    Export demand has slowed due to a combination of high prices and international shipping problems. The entire industry is facing both labor shortages and transportation infrastructure problems. Labor shortages make it difficult for warehouses to prepare cotton for shipping via rail or traditional trucking means.

    Additionally, container and truck/trailer shortages face all U.S. industries. Cotton has not been spared. Further, obtaining international shipping vessels continues to be a major delay with delays up to six weeks being more the norm rather than the exception.

    The shipping problem is also matched by the small availability of cotton due to the lateness of the crop. Yet, if the harvest was as timely as in past years the shipping fiasco would be even more troublesome.

    Export sales were disappointing for the third consecutive week as current weekly sales totaled only a net of 146,700 bales of Upland. It should be noted that the market price increase, up to as high as 116 cents, all but cut off the export sales spigot. Pima sales totaled only 6.4 million bales. Weekly sales were off 60% from the monthly average.

    China made for decent weekly sales the prior two weeks, but sales to China this week fell to only a net of 15.1 million bales. Turkey purchased 62,000 bales and Mexico purchased 59,200 bales. Only some 14 countries purchased U.S. cotton. Thus, physical demand for cotton remains very limited.

    Export shipments also continued to be weak, falling to a marketing year low of only 95,200 bales this week. Again, this reflects the domestic and international shipping problems. Only three countries had double digit shipments on the week, Mexico, 23,400 bales; China, 23,000; and Vietnam,11,300 bales.

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    Vietnam is slowly, very slowly, recovering from the Chinese coronavirus. However, it did not purchase any U.S. cotton on the week. Again, do not discount the negative impact on cotton sales resulting from prices being above one dollar. Historically, demand has been reduced once futures prices traded in the 95-105 cent range. However, China will continue to be a good buyer of U.S. cotton.

    USDA released its October supply demand report during the week. The report reduced USDA’s estimate of the U.S. crop to 18.0 million bales, down 510,000 from last month. With no changes in the demand parameters ending stocks were forecast at 3.2 million bales. However, USDA increased its estimate of the world crop from 119.6 million bales up to 120.3 million bales.

    Additionally, world consumption was reduced 700,000 bales, down to 123.4 million. Thus, world ending stocks were increased from 86.7 to 87.1 million bales. The two principal changes in the report included in 510,000 bale reduction in the U.S. crop and the 1.5 million bale increase in the Pakistani crop.

    As Pakistan is not expected to export any cotton the new estimates suggest the U.S. will be able to hold its export estimate of 15.50 million bales. The other major change was the increase in imports to China, an increase of 500,000 bales. Again, most of this will be U.S. cotton.

    While the market has been in a correction phase all week, the estimates were viewed as neutral to somewhat supportive of the market. The on-call sales position remains bullish as the mill requirement to buy futures continues dwarf the on-call purchase position.

    Bales needed to be fixed by purchasing futures contracts total about 13.9 million while bales needing to fixed by selling futures contracts total only some 2.8 million, odds very favorable to supporting current to higher prices.

    Little noticed during the volatile price swing in December from 116 to 104 cents is the fact the December 2022 futures have climbed to 90 cents. The expected price range is 89-95 cents. This expected price range should hold well into November. Cotton plantings will see a sharp increase in 2022.

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