Like the legendary Icarus the cotton market has spread its wings and continues to climb. The good news for cotton is that prices are climbing into the clouds without any fear of the Sun’s heat melting its wings. On-call sales rose again this week as the market twice exceeded the open interest record that had been established a decade back in March 2008. Increased on-call sales, coupled with higher prices and accompanied by increasing open interest, is a simple path for even higher prices as suggested last week. There is hardly any reason to be bearish. That statement, in itself is really the only bearish card to be played. The early week price consolidation on the heels of USDA’s January supply demand report enhanced the probability that the New York March contract will climb above 85 cents. Further, we do not see any fundamental reason for prices to stop there. The roller coaster price trip is on and it’s really just beginning. The steep inclines is in front of us, but traders will need the safety bar. The world shortage of quality cotton continues to propel prices higher. Dare I say Dollar Cotton? Granted, I had thought the ride was over, but the world shortage is real.
Yet, one must discount the USDA analysis of the Indian situation and its forecast of near record stocks in India. Indian prices are near a seasonal high and any excess cotton has long been gone. Seriously, does anyone really believe that Indian merchants or growers would hold any stocks with local prices, delivered to the mill, being above 85 cents? Again…Seriously, does anyone believe India would, for the second consecutive year, import large quantities of cotton when it is already the world’s largest producer? Further…Seriously, if India had cotton then why would it now default on its export sales across all buyers? (Note that Indonesia was a major buyer of U.S. cotton this week, principally due to the cancellation of a purchase it had made from India.) The market has simply neutered the USDA Indian database. Too, merchants were initially able to add some carrying cost in the market, (spread between March and May and between May and July). However, the market has returned to an essentially flat position (little to no price difference in the three near contract months). The market does not reflect the cost of carrying cotton in storage. Thus, immediate demand is the key.
The harshness directed toward USDA is no stronger than I am on myself. Initially, I felt the March futures contract would top out at 78 cents and only get there after a visit back to the 75 cent mark. The market blew through 75 cents and never looked back. The roller coaster is here, and 75-78 cents will be seen only by the December 2018 contract as that contract month is likely to climb above such. Decenter futures will have to battle 2018 U.S. plantings of 13.2-13.5 million acres, nearly a million more than in 2017. The limiting feature of U.S. plantings will be the availability of harvesting machinery. It will neither be price nor desire. Growers will plant the near “super” seeds developed by the seed companies.
We began to discuss the bullish aspects of this market when the on-call sales began to climb in November and the bullishness was further enhanced by the very bullish November supply demand report that many felt was bearish. It never was about the size of the U.S. crop, but rather the availability of high quality cotton and the ever increasing demand. The Texas freeze in November caused a number of analysts to miss the important price impact of the Indian crop fiasco. India has wrestled the world leadership in cotton from all other countries and what happens there is more important than elsewhere. Given the pest and weather reduced Indian crop there simply is little “available” cotton in the world outside the U.S. Further, U.S. quality has been limited this year and that has mills and merchants alike scrambling to find acceptable cotton. More than half of the next Brazilian harvest is already committed. The Australian harvest is near committed. There is some 2017 African crop, but the volume is limited and the 2018 production level is highly questionable. Thus, the next volume of cotton available in the world will be the 2018 U.S. harvest. Therein lies the bullishness of the remaining 2017 U.S. crop and the bullishness associated with the 2018 crop.
Thus, as much as many comment, saying, “There is enough cotton and the price increase is not based on fundamentals,” they are simply looking only at the very short run. Yet, boosting the price increase is the ever strengthening mill on-call sales position versus the on-call purchases. As commented a month ago, “watch the bulls horns grow by looking at the mill on-call sales position.”
Try as I can, I cannot find bearishness in the market. Export cancellations, maybe. Yet, if a mill wants any volume of cotton the only consistent supply is in the U.S.