No matter how you slice and dice the supply and demand numbers today, there will be plenty of cotton fiber to go around at year’s end, says Jarral Neeper, president of Calcot, Ltd., Bakersfield, Calif. “That’s why we’re seeing such reluctance on the part of the futures market to raise its head above water on the deferred months.”
Speaking at the Ag Market Network’s October conference call (agmarketnetwork.net), Neeper said the situation for nearby month futures “is certainly tighter, as desperate Chinese mills hungry for foreign fiber of good quality are trying to import what they can before Dec. 31.”
Supplies are tight in the short-term, Neeper said, especially in the United States where delayed harvests are contributing to an inversion between December and March futures.
“Additionally the marketing loan program, which is not really a marketing loan program, is causing a bit of the traffic jam at the farm gate,” Neeper said. “This is what happens when politicians with no knowledge of how the real world operates get involved in farm bill legislation. The Farm Service Agency is not adequately prepared to provide real-time information, which is leading to a whole rash of problem. It’s not the fault of the FSA. They are being asked to do the impossible, and that’s what’s causing the problem.”
Neeper says the result has been “an artificial stickiness to the free-flowing movement of U.S. cotton within the system, and this is helping to keep prices somewhat elevated.”
Textile mills that have been waiting on low prices to materialize before buying are getting to the point where they can’t wait any longer, Neeper said, which is also adding some air under prices.
Once the “stickiness” subsides “it’s anybody’s guess” on where prices go, according to Neeper. “At this point, there is no shortage of technicians suggesting 54 cents as a target.
“It’s hard to disagree with this assessment, particularly with the prospect of over 100 million bales in estimated world ending stocks and a large buildup of stocks outside China. But this market has proved itself very elusive over the last couple of years.”
USDA also raised the Chinese yield estimate to a new record and raised production as well. “The reason for that is that a higher percentage of total cotton area is being harvested in the Xinjiang Province, which is also the highest-yielding area of China.”
USDA increased harvested area in India, but reduced yields there, resulting in a 1 million bale increase in production, to 31 million bales.
Total world production was raised 1.35 million bales to 119.4 million bales, unchanged from last year.
USDA increased China’s consumption by 1.5 million bales, but China is expected to fill the additional demand with the help of incentives toward their textile mills. “This has the less-than-friendly consequence of reducing Chinese imports to a mere 7 million bales, which is the lowest since 2008,” Neeper said.
“Between 2009 and 2013, China imported an average of 16.3 million bales per year. This is the real fly in the ointment of higher prices. The world has been geared up to produce and sell and ship cotton to China. Now that China is explicitly saying no to imports via a restriction on import quotas and implicitly saying no via domestic consumption incentives, where does the rest of the world go to get rid of its exportable supplies?"
Neeper said exportable supplies in both Australia and India are lower than a year ago by a combined 4.2 million bales.
Meanwhile, weather is playing havoc with Texas production, Neeper said. After a good start in the High Plains region, heat unit accumulation has now fallen below the historical average.
“This has occurred during a critical two-month timeframe from early June to early August, which has certainly not helped yield potential.”
Estimated cotton production in Texas has been reduced from a potential 7.1 million bales to 6.25 million bales, which is still 2 million bales larger than last year’s crop. Meanwhile, USDA raised its estimate for cotton production by 80,000 bales in the Memphis Eastern region.
In USDA’s World Agricultural Supply and Demand Estimates and Crop Production reports for October, the agency lowered its range for the marketing-year average price received by producers to 55 to 65 cents per pound, following announcements by the government of China indicating a more restrictive import policy.
USDA lowered its estimate of U.S. cotton production for this season by 283,000 bales to nearly 16.3 million bales. U.S. exports are forecast at 10 million bales, despite lower expected foreign imports.
Global 2014-15 stocks were raised about 800,000 bales this month to 107 million bales. Production was raised 1.4 million bales, including increases for China, India, and Pakistan, which are partly offset by reductions for Brazil, the United States, Australia, and Zimbabwe. Stocks were also raised 1 million bales for 2013-14.
USDA raised its forecast for Chinese consumption by 1.5 million bales, as Chinese mills are expected to reduce yarn imports in favor of spinning domestic cotton.
Estimated world trade was reduced about 800,000 bales on lower imports by China. With China’s stocks now projected to fall by 550,000 bales from last season, stocks outside of China are expected to rise 17 percent to about 45 million bales.