Cleveland: Cotton Futures Hold Upward Posture
Late week sell off does little to deter upward cotton futures market.
January 17, 2012
By Dr. O.A. Cleveland
Mississippi State University
Special for Bayer CropScience
Buoyed by rising prices in China and as well as mill demand for immediate delivery, cotton futures, basis the New York ICE contract, held their upward posture despite the late week selloff. Fifteen of the past nineteen sessions have signaled higher prices for cotton. Nevertheless, the market did settle some 20 to 70 points lower on the week, depending on the contract month. This uptick in prices has encouraged cotton growers across the Cotton Belt as was evidenced by the very positive attitude exhibited at the Beltwide Cotton Conferences. For all the bearish sentiment exhibited in the market during November, the late December and early January price increase has the bulls smiling and talking cotton. While the market remains far away from any near term jump in price, the early analysis of 2012 production prospects bodes well for an increase in price.
Yet, one should not get too excited with the prospect for higher prices as much uncertainty surrounds the volume of imports China may take. That estimate seemingly increases each month, but USDA reduced its estimate of current year U.S. exports in this week’s release of its January supply demand report. Chinese imports, once forecast to range between 16-17 million bales, may climb as high as 22 to 23 million bales. That is, Chinese imports could be as high as the entire production of both the U.S. and Central Asian crops combined; or almost as high as the combined crops of U.S. and Brazil. Still not sure how much that is, it is only a two million bales short of the combined crops of the U.S. and Pakistan.
The January supply demand report was regarded as bearish for cotton and other field crops. While oilseeds and grains did suffer losses on the week, cotton held on surprisingly strong given the (a) seemingly bearish report and (b) larger sell off in grains and oilseeds. Thus, we caution about becoming bearish the cotton market despite demand problems. Most analysts point to the poor demand and suggest that the massive Chinese buying is not “demand,” but rather a simple repositioning of cotton. I would debate that in that raw cotton is being taken off the market. Granted, much of it is going into warehouse storage in China, but its future use will be spread over as many as five years or more. It is no longer available to the world cotton market. It is available only to Chinese textile mills. It is what we pointy headed economists call “derived demand” (or mill use) that is suffering. The increasing level of carryover stocks, brought about by reduced mill use, took the market below the dollar level, but as China builds stocks the market is once again approaching the dollar mark. Likely the market, over the course of the growing season, will make several robust attempts to move above the dollar mark. December should spend quality time trading between 88 and 105 cents.
USDA reduced its estimate of the U.S crop to 15.67 million bales, down 153,000. Exports were lowered to 11.0 million bales, down from 11.3 million. U.S. carryover was increased 200,000 bales and is now estimated at 3.7 million. The world 2011/12 cotton crop was lowered 580,000 bales, down to 122.84 million bales. USDA bit hard into consumption lowering it to 110 million bales, down 1.35 million bales, an abnormally large decline. The estimate for world ending stocks was 58.4 million bales, up 700,000 bales. The forecast stocks-to-use ratio was estimated at 53%, larger than both the five and ten year averages. The report can be found at: http://usda01.library.cornell.edu/usda/current/wasde/wasde-01-12-2012.pdf