Bullish response to U.S. cotton stocks forecast may be fleeting

Bullish response to U.S. cotton stocks forecast may be fleeting

USDA’s Oct. 12 World Agricultural Supply and Demand Estimates reduced the ending stocks projection for the 2016-17 marketing year to 4.3 million or 12 percent less than economists had been forecasting. 

Don’t let unexpectedly bullish USDA numbers lull you into a false sense of optimism about higher cotton prices. That seemed to be the message of the panelists participating in the latest Ag Market Network teleconference today (Oct. 13).

USDA’s Oct. 12 World Agricultural Supply and Demand Estimates reduced the U.S. ending stocks projection for the 2016-17 marketing year by 600,000 bales due to a smaller U.S. crop, expected higher foreign mill use in Bangladesh and Indonesia and more U.S. cotton exports.

“These increases (in mill use) are important because we’re seeing demand strength in importing countries, and that’s typically a good sign that the yarn market or the downstream market has improved,” said H.W. “Kip” Butts, senior cotton analyst and director energy services at Informa Economics and a regular panelist for the Ag Market Network.

“However, we would be neglectful if we didn’t comment that the expected higher prices touted by some analysts after the USDA report’s issue is, at least in my opinion, short-sighted. That said, prices have already moved up, and we should expect the market to move up short-term a bit as the market reacts to this report.”

December cotton futures rose to 68.97 cents per pound on the report’s bullish news and were trading at 68.60 cents while Butts and fellow panelists O.A. Cleveland, Jarral Neeper and Pat McClatchy were speaking during the Ag Market Network’s monthly 7:30 a.m. conference call.

All three analysts said they believe the market could go higher but that, in doing so, it will run into the same obstacle every other rally has encountered in 2016 – mills substituting synthetic fiber for cotton when prices reach into the mid to high 70s.

Losing share to alternatives

“The higher prices for cotton in an environment where cotton is losing share due to price competition will result in an even smaller market share for cotton,” said Butts. “The stronger U.S. dollar that we expect to continue given the potential impact of Fed interest rates would reduce margins for mills that use cotton and at least have them looking at alternative fibers.”

He and the other analysts also questioned USDA’s reduction of the amount of cotton remaining in China’s reserve stocks by increasing mill use by 1 million bales each over the last two years.

Butts said Informa believes about half of the bales sold in China’s reserve auction in recent months went into traders’ hands rather than to textile mills, meaning they are still part of ending stocks rather than now living in someone’s shirt or trousers.

Neeper, president of Calcot Ltd., put a different spin on the argument. “I would agree with Kip in that I think the reason given for the reduction in stocks is a little bit questionable – I don’t think they were there to begin with,” he said.

“I think they’re trying to make this step-down adjustment in stocks and blame it on consumption, and that’s OK. Earlier when they increased stocks because they thought prices were too low relative to where they thought the stocks were they started adjusting the unaccounted for and they added about 10 million bales to Chinese stocks, and now they need to reduce it by the same amount.”

Reduction not surprising

Cleveland, professor emeritus at Mississippi State University, said the available classing data on sales from the Chinese reserve stocks indicates there was some quality loss among the Chinese stocks. “USDA will have to account for that and some have speculated it may be as much as one in 10 bales. So I’m not surprised to see those stocks come down.

The situation “does keep us in the air a bit about where prices will go, but I also become very concerned sitting up here at 69 cents or above 69 cents for the substitution with the acid-based chemical fiber for cotton,” said Cleveland

The market could have an upside potential of about 73 cents for December futures, according to Neeper. “It looks like we broke out of a pattern here that suggests we have a chance to run up to 73 cents. A lot of mills have not fixed their prices – they keep waiting for lower prices, and it’s not coming to them on on-call sales. Pretty soon they’re going to have to step up to the plate and fix.

“Growers are being tight-fisted right now, and they want a decent price for their cotton,” he noted. “I think to get cotton out of people’s hands prices are going to have to go up to make that happen. But once we make that rally and merchants are satisfied with their needs being met we could fall all the way back down to 63 to 64 cents.”

Butts said he agrees mill buying could help boost prices up to a point. “The other thing I’m beginning to see worldwide is a bit of harvest pressure. Indian prices are starting to come down due to the increased movement of that crop. I do agree farmers want a better price, and merchants may have to push this thing up short-term.”

Scale-up selling needed

Cleveland said he’s also one of the analysts who thought December futures could get to 73, “but I’m thinking that if it gets to 70.5 or 71, to me, that’s close enough to 73. I do sense that every time we’ve gotten closer to 73, to the top of the range, we’ve had a failure, and I think the failure has been associated with harvest pressure, but it’s been more associated with substitution of fiber.”

Panel members suggested farmers try to take advantage of any rises to 70 cents or above.

“Anytime it touches 70 cents, I would start selling,” said Cleveland.

“I would agree with O.A.,” said Butts. “I would start scale-selling at 70 cents and be through by the time we get to 73. If we don’t make it, I’d try to run before we see 70 again. Without some kind of real problem, I think it will be a strain to see prices over that.”

To hear the presentation, visit http://www.agmarketnetwork.net/conference-call

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