Mercurial Cotton Prices Baffle Buyers

It’s not pretty. The cotton market has degenerated to whip saw activity, triple digits up and then triple digits down, but with an ever so slight downward bias as it sits near a major price support point. The 81 cent support level is close to being challenged as speculators are reluctant to increase their long positions.  Additionally, there is a slight tendency of speculators to ease out of their long cotton positions, even as fundamentals favor a move back into the high 80’s.  The new trading range, a five cent spread between 79 and 84 cents, and the bias for lower December prices is being fed by currency difficulties in Turkey and China as well as the trade tensions with those two countries. 

 

Who blinks first?  Certainly the U.S. is in better position, but the nervous Nellie types are crying to the U.S. government.  On the bullish side of the price equation is the widespread and extreme drought in Australia as the southern hemisphere planting season approaches.  Too, while continued wet weather is pushing the record Brazilian soybean crop even higher, it is potentially delaying cotton plantings in Brazil.  Too, the world’s largest producer, India, has a mixed bag of 100 year flooding in some areas, another pink bollworm infestation, and a less than adequate monsoon in other areas. 

 

December futures will continue to do battle as it attempts to scale above the 85 cent price resistance line.  Yet, more new fundamental news will be required to push above 85 cents.  The most obvious place where new fundamental support will sprout is on the supply side of the market.  Thus, the next several USDA supply demand reports will be closely watched.  Further, the market will continue to trade on news of tariff discussions with both Turkey and China.

 

Other supply based news being watched are the various pockets of boll rot occurring from the Southwest eastward into the Carolinas.  Some heavily loaded plants are suffering as persistent rain has not been uncommon across pockets of the MidSouth and Southeast.  That is a back burner issue, but we are approaching September, the time best suited for open weather so as to allow the top crop to finish setting and to allow it to move to maturity.   Just was the case in 2017 this year continues to see unusual weather phenomena.

 

The futures market continues locked in a pattern that does not reflect carrying charges (basically storage, insurance and interest.  Said another way, the Board is flat, or essentially.  December, March and May futures are all very near the same price.  The spread between December and July futures is little more than a hundred points.  This means there is not any incentive for merchants/cooperatives to hold cotton.  The risk is far too great.  Specifically, it dictates that they sell at very-very competitive rates in the world market—to sell as quickly as possible, thereby, offering very favorable basis terms to mills…to get as much cotton as possible committed to mills.  All of that simply means that merchants/cooperatives must sell at whatever price they can to just break even…to find a selling price as low as possible.  Thus, this is a bullish factor as favorably priced U.S. export sales will continue to capture market share.

 

The Chinese tariff is revealing more and more as to how well the Chinese textile industry (Chinese government) played the past three U. S. administrations.  Unlike the current U.S. administration, the prior three allowed China to totally ignore its WTO responsibilities as related to cotton.  As a result the U.S. textile industry moved lock, stock and barrel out of the U.S.  The prior U.S. administrations did little, if anything, to halt the Chinese total non-compliance of cotton related WTO regulations.  Equally important to the degradation of the U.S. cotton industry was the fact that several million bales (over and above the volume of U.S. cotton sold to Chinese mills) of Chinese produced cotton came to the U.S. in the form of apparel—cotton that Chinese producers were paid approximately 125 to 150 cents a pound by the Chinese government as it subsidized the price of the cotton that was imported by the U.S. in the form of grey goods or finished textile products. The current administration has given U.S. cotton growers the opportunity to regain their financial footing by use of the current tariff strategy. 

 

Informed cotton growers scoff at any attempt to provide the Chinese government any tariff relief whatsoever.   We could even argue for free trade, much less fair trade, but historically neither have meant anything to the Chinese government.  They have played the cotton protectionist card in the face of the last three U.S. administrations and all but dared them to do anything.  Finally, the U.S. government is attempting to stand in favor of the U.S. cotton grower.