Bullish activity engulfed the cotton market all week despite USDA’s Friday very neutral world supply demand report. After enjoying a limit up move, the market was expecting USDA to finally come to grips with its India database. Such was not the case and despite a marginally lower forecast for both U.S. and world ending stocks, cotton prices suffered a near one cent loss. The two month long bullish movement has taken prices to new highs for the season and despite the USDA report all is not lost. A further lowering of Indian crop continue to be the news from Indian traders and mills alike. This is in despite USDA’s insistence that the country has near record stocks. Note that the world’s two largest producers and all the major consuming countries are coming to the U.S. for cotton supplies. Look for the nearby March contact to climb back above 82 cents with an objective of 85 cents.
Yet, I do recall that a year ago I was calling for growers to fix at least 50% of their expected 2017 crop at 75 cents. Most were expecting prices would dip to the low 60’s and some even suggested a dip to the high 50’s. However, demand surfaced and polyester prices zoomed higher as consumers realized the contamination polyester is causing both the world’s water supply and in the food we eat. Thus, the market ran past our price projections.
Demand continues to be the path to higher prices as 2017-18 demand for cotton is approximately double the annual rate of growth. This speaks to not only to the world wide contamination caused by the use of polyester, but also of the birth of a consumer based economic sector in China in search for a replacement of cheap polyester clothing. Additionally, higher prices are being led by the market’s understanding of the USDA overestimation of production in the world’s three largest producing countries, China, India and the U.S. Too, as crude moves higher, now climbing above $70, there will be more upward pressure on polyester prices. Consumers are voicing their enhanced demand preferences by boosting cotton consumption outside the U.S. Fast fashion, big box retailers and superb marketing programs keep the U.S. consumer focusing on synthetic fibers.
Further, most all commodities are set to rally as a result of the ongoing worldwide economic expansion. Speculative funds flowing from the equity markets are feeding the speculative attitude in commodities. Cotton, of course, has been the darling of fund managers for two consecutive years and the pattern will continue. Cotton prices are rising just as the open interest in cotton trading is increasing, another signal of higher prices. Bond fund managers have publically stated that the rally in bonds is over, a likely indication of inflation. This, in conjunction with an increase in wage rates which adds to wage inflation, continues to force commodities higher. All of these factors bode well for cotton as the world’s limited supply is coming into focus. Many have declared an abundance of cotton in the world, but the market is suggesting that the limited supply of Indian cotton, coupled with the near sold-out position of the Brazilian crop and the limited availability of high quality U.S. stocks have combined to pressure prices to the mid 80’s.
Behind this backdrop, the weekly on-call sales ratio to on-call purchases becomes even more bullish. The latest report indicates that fixations (buying of futures) must occur on a total of 15,638,200 bales versus on-call purchase (selling of futures) of only 2,774 600 bales. More importantly, on-call fixations of the 2017 crop (March, May, July futures) total 11,548,900 bales versus on-call purchases of only 1,080,200 bales. This is an 11+ to 1 ratio of buying to selling. Thus, the bull will continue charging. The January supply demand report can viewed at https://www.usda.gov/oce/commodity/wasde/
USDA forecast world production at 121 million bales, up one million from its December estimate. Most felt USDA would adjust both India and Australia lower as well, but that did not materialize. World consumption was increased to 121 million, up one million from the December forecast. However, using its error adjustment, USDA lowered world ending stocks only 200,000 bales, down to 87.8 million. Look for world ending stocks to be closer to 85 million in future reports. U.S. production was lowered about 200,000 bales and was estimated at 21.26 million. U.S. ending stocks were lowered 100,000 bales, down to 5.7 million. The forecast for U.S. exports was left unchanged at 14.8 million bales. Presumably USDA was concerned that the pace of shipments was not keeping pace with the rapid rate of export sales and feared that the current pace of export sales cannot be maintained. With prices in the mid 80’s it is possible that price rationing will occur in the export market. However, U.S. growths are the most competitive in the market. The current export report can be viewed here: apps.fas.usda.gov/export-sales/cottfax.htm
Note that the new crop December is lagging behind the current bullishness in the March contract. Growers are encouraged to give serious consideration to locking in a portion of their 2018 crop with December futures now above 75 cents.