Will slowing exports and higher domestic prices in India help snap U.S. cotton prices out the doldrums? Or perhaps, will it be the recent surge in Chinese imports and the fact that market speculators are now “sitting on the fence?”
Market analysts tried their best to find some punch in the cotton market during the Ag Market Network's April teleconference, and all agreed that the biggest hurdle is getting past problems with old crop cotton.
“The cotton market has been in equilibrium since back into November and December 2006, trading a few cents below and a few cents above 54 cents. We're still stuck there now, but certainly we should see some movement in the future,” said O.A. Cleveland, professor emeritus, Mississippi State University.
In its April 12, supply and demand estimate, USDA dropped U.S. exports for 2006-07 by 500,000 bales, “a very significant number, but based on what we've seen the past few months, it was expected. USDA also dropped mill use marginally, by 50,000 bales, to below 5 million bales.
“The bottom line is that when you combine our exports and mill use, offtake is 18.5 million bales. We had a crop of 21.6 million bales, and we started with a carryover of 6 million bales. So we have a supply of 27.7 million bales. The spread between offtake and supply (9.2 million bales) has been the problem with respect to prices, along with (Chinese lack of demand). The U.S. carryover is just too heavy a burden to carry into the market for old crop.”
Meanwhile world consumption of cotton was raised slightly by USDA, while imports were reduced among several major consuming countries, including China, India and Korea. “Consequently exports were reduced from several other countries and the United States was the loser in that regard.”
Cleveland notes that another reason for lower U.S. exports is the size of the Indian crop. “Indian producers have done an outstanding job using biotechnology to improve their yield. They've always been a sleeper, and we've said once their yields take off, they'll be a problem.
“Now it's projected that India will be a larger producer of cotton than the United States.”
Some positive news is that while India has taken some of the Chinese market from the United States, Indian sales have slowed down recently and its domestic cotton price had moved higher by mid-April.
“We're also seeing a slide in the value of the U.S. dollar. That's is telling all the cotton people that they need to be reluctant to put shorts on below 52 cents.
“We're getting to the point where we're seeing the trade and others coming in at 52 cents. I think this is positive.”
Cleveland believes that the price lows are in on new crop cotton. “With this small acreage we're forecasting, we still have to get past the burden of our carryover. That will come as we move into the late planting season and into the late summer. So I do feel optimistic about the cotton market. We have upside.”
Mike Stevens, with Swiss Financial Services is encouraged by a recent surge in Chinese demand. For the first week of April, USDA had reported a third straight week of strong export sales (352,000 bales, with 170,000 bales going to China). “We're starting to see the Chinese demand coming in.”
The exports numbers, “are extremely encouraging. The market has been waiting for an announcement regarding the opening of Chinese import quotas. In the last week, a Chinese official indicated that the tariff rate quotas would come on a step by step basis to help stabilize the market. Apparently, they're doling out these quotas, and most merchants believe this round of quotas will amount to about 6.6 million bales.”
Stevens said trade guesses are that the quota will be filled with 1.4 million to 1.8 million bales of U.S. cotton.
Stevens points out that technically, “the market looks absolutely horrible, but there doesn't seem to be any downside from here. I believe December cotton will be a 62-cent item by mid-summer.”
Carl Anderson, professor emeritus, Texas A&M University, says the fact that big speculators “are short and long and their position is right on the fence, a good indicator to me. If the 9.2 million bale carryover is all that bad in the world market, I believe the specs would be very negative.”
Anderson says if world carryover drops to 48 million bales as expected, “there is a strong indication that we might have a 5-cent rise in the world market, from 59-60 cents to 64-65 cents. We roll back a 6-cent gap to New York futures which puts December futures in the 58-60 cent range with the potential of going higher as we move into the new year and get rid of some of this surplus cotton.”
Anderson added that rainfall over the last six weeks in Texas has recharged much of its soil moisture, “which is the first step in making a high yield in the western part of the state, on dryland, and even on irrigated cotton.”