Another cotton season is well and truly underway with production widely believed to be 4.6 million bales, a marked improvement on last season’s 3.8 million. Early indications of quality are encouraging and, for the most part, yields are also promising. The challenge now for the industry will be to move the cotton to export markets under some difficult market conditions. While grower prices have been attractive for the balance of the 2018 crop, well above $600, the rapid rise in price has left spinners in shock.
Global cotton consumption has rebounded over the past twelve months, however while the USDA currently has it estimate at 122.9 million bales we shouldn’t lose sight of the fact that all we have done is get back to where consumption was at the time of the global financial crisis. That means we really are not regaining any market share as the world’s population has increased and logically so has the requirement for textiles. Cotton demand on the face of it does appear strong, particularly if you are selling USA cotton, however you must question what is selling. The USA had a strange 2017/18 crop production which was originally projected at 19 million bales but grew to 21 million bales. You would imagine this should have been negative for prices however that turned out to not be the case as the US produced a mixed quality crop that has actually helped them
sell more and tighten the projected balance sheet. For a few months now, the weekly USA export sales reports have revealed excellent demand with strong sales to a wide range of markets that now total over 16.5 million bales (480 lbs) leaving everyone questioning the current USDA estimate of ending stocks at 4.7 million bales. Surely the position is much tighter than this?
Rather than producing a high-grade crop Texas produced four million bales of low micronaire cotton and it is this “new product” that is capturing all the sales. Why? Because it is the cheapest cotton available and can be used by spinners all around the world, hence the demand from the wide range of markets and the great volume of sales. This cotton has to be sold, it is cheap and the four million bales only became available after December so that’s why we are seeing the sales, it’s not high grade premium cotton!
Perhaps influenced by the above the cotton futures market has been confusing and leaving traders scratching their heads more times than not. It seems the market is just as much influenced by “outside” events as it is actual cotton market developments and this has produced some volatile movements in recent weeks. An ever-tightening US supply and demand situation is supportive of prices but then we get trade war concerns, actual war concerns, global financial concerns and a few Presidential “tweets” to give us plenty of risk on and risk off days, hence the volatility. Potential trade disputes between the USA and China could be the significant development, particularly if a threatened 25% import duty on US cotton into China comes into play. The ramifications of such a move could be very interesting to say the least. Bottom line is that prices appear well
supported on cotton fundamentals but prone to outside developments that may not be that supportive.
This time of year is typically a “weather” market as the Northern Hemisphere plants their new crops and this season the major attention once again is on the West Texas region. At the time of writing, conditions remain extremely dry in the world’s largest cotton patch and that concern is increasing as we enter the period of latest planting dates. The US is expected to increase planted area by nearly 7% this season but if it doesn’t rain in the next few weeks then production will be smaller than last season, potentially around 18 million bales which will make for some interesting trading.
China, as always, is in the market discussion with plenty of rumours about what they are going to do with their import situation. Currently China is into its fourth month of Reserve stock sales and while the daily offtake was a little disappointing to start recent weeks have seen heavy demand and the daily offer of 30,000mt all being taken up. No doubt some speculative element has been at play because of the potential crop problems being experienced in Xinjiang but whichever way you look at it the supply and demand situation is getting tighter in China. Of course the big guessing game for everyone is when will China allow more imports than just their WTO required 894,000mt. It might be the second half of this year but most likely is 2019.
In summary the coming few weeks promise some interesting trading conditions as we transition from current crop to new crop. The high level of July and December futures is making the sale of Australian 2018 crop difficult but we must hope that the spinner requires high quality premium cotton because at this point in the season Australia is the only place that has it until the end of this year.