The musical world told the story of cotton trading this week…low low prices and no high prices: The lyric “It’s all about the bass, no treble” told the full story. There was nary a high note to be heard, just all low and lower notes came out of the mouth of traders. Trading took the market down a thin dime, a 1000 points; now we can look for some recovery and hope for a little treble.
Prices sensed troubles at the prior week’s close as rain clouds appeared over much of the drought stricken Southwest. Much of Texas received excellent moisture, but granted, crop insurance adjustors were already the fields appraising fields where Mother Nature’s drought had already caused the production potential to be “zeroed out.” Small speculators and big hedge funds saw a chink in cotton’s armor and with the mention of a cotton tariff by the Chinese government the run on the bank was on. Cotton prices as well as prices for all other crops collapsed. Scale down buying kicked in as mills used the price collapse to make price fixations and were ecstatic that they did not get caught having to make fixations in the 90’s. Short of a very unfriendly Mother Nature in China, the U.S. Southwest, Brazil or Australia the potential for prices to return to the 90’s is little more than a pipe dream. The importance of Brazil and Australia is based on the world’s need for high quality cotton to fill immediate and ongoing needs. The Chinese need U.S. cotton and will get it tariff or not tariff. A tariff on U.S. cotton entering China will not affect the actual supply demand balance sheet for world cotton. It will however, scare off a few Nervous Nellie traders. Cotton is a scarce commodity and the market will continue to reflect such.
The question becomes, “Will the market give me a second chance?” A typically active market always gives a second chance. The true marketing test is whether the grower learns to take advantage of a second chance, but more importantly to recognize when a first chance is being offered. Coupled with that, the grower must develop the discipline to take advantage of the first chance. That is, is it doubtful that the market will offer growers another chance at 93-94 cents, basis December. Yet, it is likely the market will again attempt to trade in the upper 80’s. The idea is to learn to scale up one’s pricing and to take advantage of a market as it is rising. The key is to focus on pricing that affords a profit, not to hit a price target, but to hit a profit target.
Demand remains at the base of the current market. Cotton demand is strong and still expanding. Too, mill order books continue to fill, and in line with that, mills are very active in booking cotton for the first and second quarter of 2019. Export demand for the 2018-19 cotton marketing year is exceptionally strong. Current marketing year exports continue to run ahead of USDA projections. Current year export demand is running some 110 percent of the USDA projection. Exports shipments were slightly lower on the week, but still were well ahead of the current USDA projection with just slightly less that two months left in the marketing year. Weekly export sales were a negative 112,400 RB as cancellations exceeded weekly purchases. This was not surprising as the cancellations came as cotton climbed to 94 cents. Most of the export cancellations were the result of mill/merchant agreements to take advantage of profits offers in the futures. The cotton purchases, in most cases, was executed again at a lower price for the mill. Thus, mills captured speculative trading profits on the cancellations. This was borne out in the export report in that 2018-19 sales were a surprisingly high 295,400 RB. Too shipments remained on pace to exceed the current USDA export estimate of 16.0 million bales. The export report can be viewed at: apps.fas.usda.gov/export-sales/cottfax.htm
Monday, June 25, is first notice day for the July contract, thus, the 2018 crop futures contras are moving off the board. Mills still have limited fixations and this will add support to the market. Additionally, world demand is strong enough to maintain futures contract prices in the 80’s with some hints of attempting to run near the high 80’s The 2019 and 2020 cotton crops are undervalued in current futures trading. Thus, be alert for the December 2019 and the December 2020 prices moving higher and work with those prices increases to lock in a profit.