Cleveland: Cotton Market Gets Defensive
After a week of noteworthy gains, the cotton market entered a consolidation phase.
February 12, 2013
Cotton prices were on the defensive the week of February 3 - 8, as prices entered a consolidation phase after the prior week’s attempt to take out 84 cents in the December contract. The March contract could easily move lower to the 77-78 cent level as price activity stabilizes and begins to build another base to move higher.
Market activity has been more associated with the March contract rolls and the expiry of March options (today) than fundamental news. The market remains poised for another leg up with a challenge of the 84 cents in both the nearby and December contracts.
During all this there has been a basketful of fundamental news, but it was generally as expected - thus, it has not caught the market’s attention. Friday was the release of the February USDA supply demand report. Saturday morning held the release of the National Cotton Council (NCC) annual planting intentions announcement. Most feel 2013 planting in the U.S. will total between 9.3 and 10.0 million acres.
Historically, the NCC report has been a very good predictor of annual plantings. I am looking for a number closer to 9.0 million acres; knowing that Mid-South and Southeastern growers love to plant cotton, but also hearing them comment on the economics of the higher priced soybeans and corn. (Ed Note: Cleveland wrote this column on Friday, February 8. The NCC’s projection the next morning was 9.01 million acres.)
The primary news in the supply demand report was USDA’s decision to raise U.S. exports 300,000 bales, up to 12.5 million. Actually, the U.S. is on pace to ship 13.0 million bales. Granted, the export sales pace has slowed the past two weeks with March above 81 cents, but there are large amounts of sales 100 to 300 points below the market. Those sales will spur the market upward.
China remains the news in the global market as both yarn and raw cotton imports dominate activity there despite the fact that USDA raised both its estimates for Chinese production and Chinese carryover stocks. Nevertheless, the Chinese government has purchased some 80% of the country’s 2012 production and is withholding this cotton from the market and it withholding it from the market. (The purchase was near 140 cents per pound, but Chinese production cost averages above 130 cents.) Thus, the Chinese futures market hit a lifetime record high this week; very surprising in that the country controls 52-55 percent of the world’s stocks. Too, world carryover based on the USDA forecast stands at some 82 million bales, also a record.
It should be noted that Chinese textile consumption is actually increasing, but has been slow to be included in Chinese estimates because of the record amount of cotton yarn that is being imported.
As we have said month after month, look for USDA to continue to raise its estimate of U.S. exports, world consumption, and begin to lower its estimate of carryover stacks.
Cleveland is a Professor Emeritus, Department of Agricultural Economics, Mississippi State University.