Cotton prices kept their grip on 69 cents, basis December during the week, but short term signals and long term fundamentals continue to favor the market testing its 65 cent price support. While the market does have a few bullish factors on its side, the realization of a 119-121 million bale crop is expected to keep the bull fighting for every point it can muster. The October contract moved to first notice today without any fanfare. The potential for a price squeeze held the only potential for a near term rally. Thus, the December contract is now left with the reality of December futures slipping lower. The trading range has tightened, but the 65 cent floor remains in play while upside potential falls back to 71 cents, and still with a downward bias.
As noted last week the market must come to terms with the bigger than expected Indian and Chinese crops. Post hurricane data adjustments by USDA will reduce the currently estimated 21.7 million bale U.S. crop, possibly to as low as 19.5 to 20.0 million bales. However, the world crop will still total 119 million bales, if not larger. Further on the side of the bears is that world ending stocks, as well as Indian and U.S. ending stocks, will increase. It is the combination of these supply fundamentals that will keeps the 70 cent lid on prices and continues to push prices lower.
Yet, the market must account for the bull’s argument for higher prices. The bulls do have a point to make. However, as impressive as the bullish fundamentals factors are, the supply side of the price equation is simply dominated by excessive stocks. Nonetheless, it is these bullish factors that will likely work to hold the December contract at its 65 cent price support level and keep the market from facing a test of 62 cents.
First, USDA continues to insist that the Indian stock level is 14.6 million bales versus the 8-9 million bales most analyst predict. Should/when USDA comes to grips with this issue its adjustment could well add several cents to the market. At current levels a very general rule of thumb would be a one cent plus price increase for every one million bale drop in Indian stocks. Additionally, as earlier stated, that the USDA estimate of the U.S. crop will likely be lowered to between 19.5 and 20.0 million bales. This will influence USDA to lower its current export estimate of 14.9 million bales as the big Indian crop becomes more available to the export market. Yet, more importantly, U.S. ending carryover will be also lowered. Further price support will come from mill on-call sales which set a record for the third straight week at 132,649 contracts. (13,264,900 bales), up 1,569 contracts (156,900 bales) on the week.
Other bullish factors include the overwhelming success of daily auction sales by the Chinese National Reserve. The Chinese have been hard and true to their announced cotton market reforms. Too, coupled with the political economic power of the government, China is disappearing their stock level much more orderly and rapidly than any thought possible. One remarkable feature of this is that the Chinese are on the cusp of becoming a major world importer after a decade plus period of building inventory through excessive domestic production. That is, the government has learned that it is at a comparative disadvantage in the production of cotton. This season’s Reserve sales have totaled slightly above 14 million bales. The sale period has just one week to go and the yearly sales could climb to 14.6-14.7 million bales, some 2-4 million bales more than had been expected. Additionally, the Reserve stocks balance will fall to below 25 million bales, down to approximately 24.3 million bales remaining for the 2018 round of auctions. As stated several times over the past two years, the Chinese auction program has been very efficient with the plus of maintaining stability in the world cotton market. Further, the program has proven to be an integral part in increasing Chinese cotton consumption, thus adding a spark to world cotton consumption.
Finally, another bullish price factor on cotton’s side, and again from China, is the increase in price of polyester. China has come to recognize the significant environmental damage caused by polyester production. Chinese polyester production has been centered in heavily populated areas. Water and air pollution has far exceeded acceptable standards. Too, developed countries are discovering more and more polyester micro particles in their drinking water as well as their food supply. Because of this environmental bombshell, brought about by polyester production, the Chinese government has shuttered some plants, reduced the capacity of others, and is now limiting the construction of new polyester production facilities. Thus, polyester prices have eased higher as supplies have been trimmed. China, accounting for the bulk of the world’s polyester production, has raised polyester prices over 6 cents since January 2017. Thursday’s quote was 60.96 cents per pound, or 8975 RMB per metric ton.
These bullish factors will not likely have much price impact until the nearby trading begins to focus on the May and July 2018 contracts and on the new crop 2018-19 contracts. Thus, for now we must be content to trade the big world crop, even in the face of improving consumption, of fighting the price battle between 65 and 71 cents.