Thompson On Cotton: Strong Market Momentum Still With Us

June 12, 2018

By Jeff Thompson, Autauga Quality Cotton Association

The stars continue to align and shine on the cotton market. Strong demand in the face of tight supplies has kept this market in an uptrend for months.

After taking some time to break through the mid ‘70s, the pace quickened in its climb through the ‘80s. Aware of the extreme drought conditions in West Texas and the toll it could extract on the U.S. crop, traders have been steady buyers of the market.

Since May 1, the market has gained over 12 cents, leading many market gurus to believe 90 cents was very possible. But even the most optimistic of these knew other bullish influences, aside from West Texas, would be needed to do so. As fate would have it, recent developments out of China provided just the spark.

In light of this, new crop prices traded in a range of 858 points last week, closing at 90.65, a contract high.

The China Syndrome: More Imports Ahead

It has become quite evident that China, the largest consumer of cotton, will face a serious shortage of this raw material. The first hint being their reserve auction offerings are selling out every night. This not only indicates their need for cotton but at the same time reduces a once massive volume of stocks that has hung over the market like an anvil.

Adding to their dilemma, a cold, wet start in their major cotton producing region threatens to significantly reduce current year production. Some sources estimate by as much as 20%, which would be the equivalent of 6 million bales.

With their consumption already expected to exceed production by 14 million bales, this looming shortfall will force China to import more cotton.

Even more promising, this renewed global demand for cotton doesn’t appear to be a flash in the pan but rather a philosophical change in thinking. It is being fostered by polyester fiber’s new unfriendly image, environmentally speaking, and higher prices due to imposed manufacturing regulations.

Since early April, the Chinese cotton market is up over 18 percent, as a direct result – which ICE has kept in step with. Though some tout this as artificial, the work of speculators in both markets, the fundamentals are too strong to discount in such a manner.

Where Do Politics Play Into This?

Another sign their deficit is for real, and probably the most compelling, was their announcement over the weekend that import quotas would be raised. However, it was absent of any specifics as they indicated a long-term agreement with the Trump administration on tariffs is wanted before disclosing terms.

Although the U.S. administration has tweeted “China will buy all the ag commodities the American farmer can produce,” the tariff issue has not been finalized. It was uncertainty over this matter which led to a three-cent selloff in this week’s early trading.

We’ve often said that, despite strong fundamentals, the biggest danger or threat to prices would be from something outside of cotton.

Going forward expect these favorable fundamentals to provide additional momentum. As was seen yesterday, when prices quickly rebounded erasing much of the losses from the previous two days closing once again above 90 cents at 90.55.

This market will continue to be volatile as it reacts to the news of the day such as changing weather, government policy, etc. In the end, however, China will desperately need to import more cotton, the type of which the U.S. produces. A major weather event is needed to correct the drought situation in Texas, but time is running out.

Not to mention, India’s planted acreage and production will be subject to their battle with the pink bollworm. All that said, cotton’s balance sheet begins to look eerily similar to 2012.

These factors will ultimately steer the market giving prices significant upside potential with minimal downside risk as it seeks to satisfy demand.

Category: Agriculture