Market Comments – December 13, 2018

NY futures moved slightly higher again this week, as March added 33 points to close at 79.41 cents/lb.

March continues to be stuck in a sideways trend, as it has now closed the last 62 sessions in a 463-point range between 76.82 and 81.45 cents/lb. Momentum indicators and moving averages are flat-lining and volatility has once again dropped below 20% across the board, which is a sign that market participants don’t expect this situation to change anytime soon.

Tuesday’s WASDE report was greeted with a big yawn by the market, as just 25k futures were traded and March closed basically unchanged. There were no big surprises in the report, as both global production (-0.65 million bales) and mill use (-1.25 million bales) continued to be scaled back.

Production has lost 3.23 million bales since the September report, while mill use has been lowered by 2.31 million bales during the same time frame. We continue to believe that mill use is nowhere near the 125.63 million bales the USDA currently shows, since it would still be 2.47 million bales above last season and 9.46 million bales more than in the 2016/17-season. That’s definitely not the case and the market knows it!

The US crop was raised slightly to 18.59 million bales thanks to a 300k jump in Texas, which is now projected to produce 7.0 million bales. However, since these numbers were compiled, West Texas has received a record amount of snowfall, with Lubbock receiving 11 inches last weekend. With an estimated 20-25% still in these snow-covered fields, we have to assume that this weather event has taken a toll on both the size and quality of the remaining crop.

Speaking of quality, the latest monthly classing report as of November 29 showed just how different the quality composition of the current crop is when compared to last season. A year ago we had 11.0 million out or 19.7 million running bales classed as 31-3s or better grades. This season we had just 2.4 million bales of 31-3s out of 8.9 million bales classed.

The second half of the crop might yield another 2.5-3.0 million bales of top grades, mostly from West Texas and the Far West, but we will probably end up with less than half as many 31-3s or better grades as we had a year ago. Since we went into this harvest with a record amount of commitments, a lot of which were for high grade green cards, shippers are currently struggling to sort out this mismatch between what is owed and what the crop provides.

The latest export sales report seems to reflect some of these problems, since net new commitments rose by only 91,500 running bales of Upland and Pima for both marketing years. What reduced the net sales number were cancellations of a combined 62,700 running bales in six markets. We believe that these cancellations are linked to the above-mentioned quality problem and that this is probably just the tip of the iceberg. Meanwhile shipments remained relatively slow at just 166,200 running bales.

For the current season we now have commitments of 10.6 million statistical bales, of which 3.05 million bales have so far been exported. Sales for the next marketing year are at 2.15 million statistical bales, which is about a million bales more than a year ago.

However, as we have explained last week, the world cannot get by without US exports, especially when it comes to machine picked cotton with good fiber characteristics. The USDA currently estimates global exports at 41.72 million bales, of which the top 5 origins (US, Brazil, WAF, India and Australia) account for 34.25 million bales, or 82%. The US is by far the biggest exporter at 15 million bales, or 36% of the total.

The US is also the only one of these origins that is able to ship 2 million bales in a month. Many of its competitors have logistical limitations. Brazil for example doesn’t ship more than 0.4-0.5 million bales a month, while Australia has a small crop coming with only around 2.5 million bales. Therefore, the US cannot be taken out of the equation since it is the major supplier of machine picked cotton.

Despite all the grade problems the US is having, fiber characteristics such as staple and mike have remained quite good, even better than in previous seasons. Therefore, once all the contractual issues have been sorted out, mills will find ways to use these SLM and lower qualities over the course of the season. However, we feel that the market needs more carrying charges to facilitate this process.

So where do we go from here? Probably nowhere in a hurry. December left the board at around 78 cents, which we feel is in the vicinity of ‘fair value’ for SLM-style cotton today. Since there is such an abundance of SLMs this season, we believe that the NY futures market will be tied to the cash market until the inventory of these SLMs has been greatly reduced at some point in the future. 

In other words, if the cash market starts paying higher prices for SLM-style cotton, it creates room for the futures market to rise, and vice versa. However, at the moment we don’t see much price movement in the cash market, which means that NY futures are not expected to move much either.

Factors that could change the status quo are new developments in the US/China trade dispute and/or the state of the global economy. For now we go with a continuation of the sideways trend between roughly 77 and 82 cents, which has been in force for nearly three months. 

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