The cotton market has returned to the 1965 days of the hit song, “Catch Us If you Can,” making an effective high of 78 cents, basis December at week’s end. It is not through yet. It’s been more than two years since the grower was so blessed. Short term, the market is very bullish, but look for the bears to return next year. In keeping with our message of last week's growers are advised to be at least 50% priced at current levels. Some may want to even go out to December 2017 and price 10% of next year’s crop. Yet, that opportunity will be around a bit longer, but mark this down: World production in 2017 will soar, Mother Nature willing. Additionally, 80 cents plus cotton this year will only lead to an increase in the substitution from cotton to acid based synthetic fibers in the spinning process. In fact, the switch is now being made daily in China. Nevertheless, this market has 80 cents written all over it and who knows how much higher.
Near record heat and drought continue to push prices higher as the U.S. crop goes backward. Granted, the Indian crop caught its million dollar rain, but that crop will still be below expectations as earlier drought concerns had already diverted substantial acreage from cotton. The Texas plains have received nothing more than local showers and the Midsouth is in the midst of a heat index of 115 degrees. Fruit shed is prevalent and if the stressed crops were to receive moisture now the young fruit would be shed and the plant would restart its productive juices.
Now comes the August world supply demand and the first U.S. objective yield survey of the year. The report will be released next Friday, August 12 at 11:00 A.M. Central time. The report will be based on conditions as of August 1. It can be viewed minutes after that at http://usda.mannlib.cornell.edu/MannUsda/viewDocumentInfo.do?documentID=1194
Look for a crop estimate of 15.4 million bales, down 400,000 from the subjective estimate in July. However, this early in the season the range is between 15.2 and 16 million bales. Yet, you are again reminded that the crop is going backwards. U.S. domestic consumption and exports will be unchanged at 3.6 million bales and 11.5 million bales. However, the greater the crop reduction below 15.6 million bales, the greater the tendency for USDA to marginally lower exports. Yet, with just one week into the 52 weeks 2016-17 marketing season it is too early to make anything other than subjective changes. Nevertheless, current export sales remain very positive. Additionally, the few remaining certificated stocks continue to move in the export market every week. This also offers support for higher prices.
With the exception of the disaster facing Texas the market’s focus is on China, India and world consumption. A litany of events and issues are at the center of the market fundamentals surrounding those countries. First, Chinese Reserve sales, the three-month-old darling of the market, have slowed dramatically. In tune with that slowing has been a dip in Chinese futures prices, demonstrating once again the market magic of what goes up does come down. Yet, the slowdown in Reserve sales was probably related to the Chinese announced policy of its calculation of the Reserve’s minimum selling price as opposed to a reduction is demand. (The market will answer that next week.) Simply, the calculation showed that Reserve cotton could be purchased more cheaply next week. Thus, it was logical for sales to slow. Yet, should sales fail to pick up next week then we should question the validity of slowing demand for Reserve stocks, an issue not expected.
Finally, a long-standing issue could begin to find resolution in the August world supply demand report. The world cotton industry has been unanimous in its opinion that USDA has significantly overestimated Indian carryover stocks. Most also feel the USDA carryover estimate for China is somewhat bloated as well. To their credit USDA has explained their methodology. Yet, it is past time to bite the hard bullet and make meaningful corrections. Listen to the market. Indian and Chinese stocks should both the adjusted some 5 million bales lower. That is a huge number, a combined 10 million bales. Unprecedented one could say. Maybe Chinese stocks are only 3 million bales, too high one may argue. There is enough information with respect to Reserve stocks that fail to meet minimum classification standards and past questions of simple overestimation to make meaningful changes in Chinese stock levels. (Again, to USDA’s credit it correctly resisted calls for disappearing the entire Chinese carryover due to its age—and none of us ever though its three-year-old cotton would sell for a dollar per pound.) Yet, there can little doubt about the Indian overestimation. India, The world’s largest producer and the second-largest textile manufacturer is being forced to import cotton to keep its spinning mills open. Again, a 5 million bale overestimation is unanimous. Some think it is 7 million. If India has the cotton USDA claims then why would they not use it instead of importing high-priced cotton? If they have it why have domestic prices soared to the highest price of the year? If they have it why have world prices been up nearly two cents a day for over a week? Surly no one thinks a rain in Texas would send the market 12-14 cents lower, so has a lack of moister in Texas the reason for 14 cents. Not even close. The market is speaking volumes. The market is not wrong. The market is always right. The Texas situation is drastic, but it is supportive, not the basis for the rally. Yes, markets overshoot and undershoot, but at the end of the day, the market is better than all the answers in the back of the book. The back of the book has printing errors, the market does not. If you don’t believe it, ask your banker. It is time for the back of the book to be corrected.