The U.S. is running out of cotton, again. Likely, a few of you are thinking my medication has gotten the best of me. The November USDA world supply demand report estimated U.S. carryover would balloon to 6.1 million bales. I did not protest much, but really felt carryover would be much closer to 5 million. Yet, now just two weeks later, and reviewing current sales, coupled the world production scenario and the booming world demand, it is evident that the U.S. will sell most of the current 21-22 million bale crop and U.S. carryover will fall back to some 3.5 million bales. Assuming, not the current pace of sales, but just the slower historical pace, the U.S. will essentially sell out of cotton this season just as it did during the 2016-17 season. In fact, some mills are already booking U.S. cotton as far out as 2019. Someone sees a shortage coming. Demand based markets are not bearish. I noticed a comment on Facebook that the cotton market was caught in the classic battle of supply versus demand. Not so, empathically, not so. It is a battle of supply versus supply, two supply’s, and a very unusual set of fundamentals. The battle is between (1) the big U.S. supply that is being aggressively marketed, and (2) the potentially adequate foreign supply that, for various reasons, is not available to the world market. (Maybe it is not adequate after all.) Throw in a surging demand and the plot thickens. Add a production shortfall in a couple of major consuming countries and rapidly increasing polyester prices due the environmental pollution polyester is facing...and the result?
Not much! Cotton is well positioned to stay just about where it is. Yet, that was the setup for a very bullish picture and I am bullish. More correctly I am “very optimistic.” There are no reasons for prices to move, at least given the current set of fundamentals. Upstream yarn demand is strong and mill margins are positive. Mills will continue to buy. The 65-70 cent New York futures price is very attractive to mills. The trading range is solidifying even more. The five cent range is actually working in a much tighter, three cent, 67-70 cent range. Yet, I do not discount a slight attempt to move the range a 100 points in either direction. If one focuses on U.S. supply the argument for lower prices carries the day. However, if one focuses on world demand the bulls win the day. This equilibrium price trading range is getting old to traders and analysts, but the market just cruises along, oblivious to our feelings. The price bias is up and the market will likely carry the price level up to 72-74 cents, later in the season. Yet, for now both December and March futures need to remain in the high 60’s to very low 70’s to insure export sales. Thus, the marketing strategy is as in nearly all years: Price your crop before harvest and buy a two to three cent out of the money July call option—or some similar strategy.
The big U.S. crop just keeps getting bigger and bigger. We have been amazed at how big the U.S. crop is. The earlier notion that the hurricanes and other weather effects would take a significant bite out of the production was incorrect. Simply, we did not realize the record fruit load the crop was carrying. That is, as much as we had praised the seed companies for delivering high yielding varieties, we had not praised them enough. The record 900 pound per acre yield USDA estimated in its November crop report could have possibly been a hundred pounds higher had it not for Harvey, Irma and the early Texas freeze. The hurricanes put a bale to a bale and a half on the ground. The freeze In District 1N wiped out the West Texas top crop. Had it not been for those weather disasters the market would be looking at the low 60’s. Just remember, the seed business has changed. Too, demand has changed.
The big world crop is not coming online as projected. The Indian subcontinent crop is not as forecast. For now India has essentially withdrawn from the export market and that has left the U.S. with the most competitive priced cotton on the world market. U.S. is cheaper than West African, Indian and essentially all other growths. Mills are content with the aggressive basis being offered by merchants and cooperatives. Thus, U.S. export sales are significantly ahead of last year’s pace when the U.S. sold some 15 million bales to world textile mills. Pakistan, also facing production problems and unable to obtain cotton from India, has come to the U.S. the past three weeks buying cotton. They have already purchased over 600,000 bales and will continue to buy. USDA will now increase its export estimate from its current 14.5 to possibly 15.5 million bales in its December report. That would be a huge jump, but if “normal historical” sales, not the current higher pace, continues then even that increase will have to be raised later in the year. The U.S. is awash with cotton, but it is due to be shipped at a pace we have never before witnessed.