Cotton Prices Retreat, Preparing for Next Bull Run

“Here we go again, catch us if you can,” is a lyric from the 1965 hit song, Catch Us if You Can, and it reminds us of current trading in cotton as the market sulks back to 80 cents as it consolidates and prepares for its next charge toward 85 cents.  The breakout above 80 cents continues to build its base building in the very low 80’s as it prepares for the next challenge to break above the 85 cent level. Export sales and the textile mills affinity for kicking the price making decision down the road support higher prices.  Some see a weak export market based on this week’s activity, but actually it suggests more price strength is coming based on the increasing volume of cotton whose price must be fixed on the March, May or July futures contracts.  The slow sloppy market consolidation may continue another week, but cotton demand is on the upswing and demand moves markets. Old crop will return to challenge 85 cents and the fire underneath the new crop December is lacking any water to douse the flames.  In fact, the Southwest is dry and facing its two driest months.  The upcoming Australian crop and the Brazilian second crop are off to slow starts due to dry conditions.   

Weekly exports appeared at first glance to be very disappointing as net sales were only 67,700 RB of Upland and 5,200 RB of Pima.  Shipments were a pleasing 232,500 RB.  Sales for 2018-19 were an impressive 107,800 RB. This export report requires a multitude of reading between lines.  Total sales, before cancellations were 257,900 RB, suggesting a very healthy appetite for cotton.  However, China cancelled 69,300 RB.  Anytime the market moves higher in rapid secession it is typical for Chinese mills and the U.S. merchant/coop holding a respective sale to agree to cancel the sale and take/split the profits from the underlying futures hedge.  The mill can usually make more money by cancelling than by actually spinning the cotton—so it is profitable for the seller and the buyer to split the gain in futures and look to another day.   This activity has been popular with Chinese mills.  Additionally, it should be noted that Chinese mills were in the market for another 52,000 RB on the week. Too, China was a limited buyer of 2018-19 crop.  Total sales across both marketing years were near equal to total weekly cancellations. Therefore, this was simply business as usual for Chinese mills and not a bearish signal.  The 112,200 RB cancellation by Bangladesh mills was thought to have invoked some of the same strategy. Too, some of those cancellations were with mill and merchant/coop agreement as some Bengali mills have reneged on sales in the past.  However, given that the cancellation occurred at this time of year suggests a mutual agreement.   Further, it should be noted that 77,000 RB in Upland sales were made to Bangladesh for the 2018-19 season along with 13,900 RB of Upland sold to Bangladesh on the week.  Thus, the actual discrepancy in sales and cancellations was very small.

Too, it should be noted that for the marketing year to date, 42% percent of the cancellations, or 199,000 RB, have been with Chinese mills simply to take advantage of favorable futures profits rather than demand or origin issues.   Additionally, the increased availability of low grades coming out of the Southwest has caused that cotton to move at low prices and mills are taking as much as they can.  This is proving to buffer increased exports (cheap low quality cotton) and a further decline in U.S. carryover. 

The declining availability of high quality cotton is adding upward pressure on the 2018 December as mills are beginning to now book 2018 U.S. crop cotton, for immediate delivery.  This has created an invert in the 2018 crop futures as mills are already bidding for the immediate shipment of 2018 crop high quality.  This demonstrates why the December 2018 contract has found excellent support at the 74-75 cent level and why growers should have an ample opportunity to price the 2018 crop at 75 cents and better.    The Bull is still feeding.