Market Comments – January 31, 2019

NY futures rebounded this week, as March gained 126 points to close at 74.40 cents/lb.

March continued to grind higher this week and posted its highest close in six weeks. The chart shows that the market is currently in a short-term uptrend that started from a low of 70.65 on January 3rd, but from a longer-term perspective we are still in a downtrend channel dating back to early June of last year. In order to negate the bearish framework, March would have to cross above 76-77 cents, depending on the timing.

The government has been slow in starting up again after the shutdown ended last Friday, as it will take several weeks until we are caught up on missing data. Today the USDA released its export sales report for the week of December 14-20, which was surprisingly strong, showing that a marketing-year high 384,900 running bales of Upland and Pima had been sold.

Participation was strong with 19 markets buying, while 21 destinations received shipments of 221,800 running bales. Buyers took advantage of a falling market during that week, when prices dropped from a high of 79.94 to a low of 75.02 cents. Considering that prices were even lower during the six weeks that followed, we should get several more upbeat reports.

Total commitments as of December 20 were at 11.15 million statistical bales, of which 3.45 million bales had been exported. These numbers were very similar to those of a year ago, when sales amounted to 11.40 million statistical bales, of which 3.30 million bales had been shipped.

Remember, last season exports ended up at 15.85 million bales, whereas the latest estimate for the current season is at 15.0 million bales. Since prices are still a little cheaper than a year ago (March was at 78.28 at the end of January 2018) and the mix of qualities on offer is quite attractive to mills, we feel that exports will exceed the current USDA estimate.

In the absence of recent data the market is still trying to figure out global mill use, which will be key to prices going forward. There have been reports of burdensome yarn stocks in some markets and we also have a slowdown in global growth, which has tempered the optimism that existed at the beginning of the season.

While the latest USDA estimate had mill use at 125.6 million bales, most traders we talk to feel that demand is somewhere between 118-123 million bales, with the middle of this range probably being priced into the market. However, while demand growth may have slowed down this season, a look at the bigger picture leaves no doubt in our mind that cotton consumption is trending higher in the long run and that production will have its work cut out to keep pace over the coming years.

When we look at global GDP, the estimate for 2018 was USD 84.8 trillion, which means that it has more than doubled over the last 15 years! The 2008 financial crisis now looks like a blip on the chart, as GDP has grown by over 24 trillion dollars since 2009. In other words the global economy continues to expand, and even though the growth rate is slowing, the annual increase in absolute terms is still staggering.

China, who at 13.45 trillion dollars has the second largest GDP after the US (20.5 trillion), has seen its economy nearly triple from the 4.6 trillion dollars in 2008. Therefore, if the Chinese economy “slows” to 6 percent growth, it still equates to the same dollar amount as an 18 percent growth rate in 2008. We therefore need to be careful not to get blindsided by these slowing growth rates, because China can’t possibly grow at historic rates at its current size.

The same goes for global population. While the growth rate is slowing, we are still adding about 84 million people to the planet every year, or about 1 billion people every 12 years.

Therefore, against the backdrop of the sheer size of global economic and population growth, it is difficult to become too negative on cotton consumption going forward. This is especially true if we consider that cotton has made some inroads against polyester in recent years.

So where do we go from here? As pointed out above, the market is currently in a short-term uptrend within the confines of a primary downtrend. It will take a move above this downtrend line, which currently runs through around 76-77 cents, to cancel out bearish forces.  

We still see very strong support in the 70-72 zone and it would take a negative external event to crack through that level. The upside seems to have a lot more potential going forward, although the bulls may have to be patient until a trigger is found.

Judging by the narrowing of the spreads this week, the bulls seemed to get more confident that inventories won’t be much of an issue going forward. The March/May spread narrowed to 126 points from 145 points a week ago, while the July/Dec inversion grew from 187 points to 270 points July over. Maybe the pace of exports or China entering the market in a bigger way will prove them right and we’ll end up with a tight carryover by summer.

Even though we give higher odds to a bullish scenario, we are not quite ready to jump on the bullish bandwagon yet and continue to see the market range-bound between 72-77 cents for a while longer.

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