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Demand for Physical Cotton Good, Futures Stuck in a Rut

By John Johnson

The high number of inquiries from export markets for U.S. cotton this harvest season thus far indicates demand is good, and the crop has been moving into the supply pipeline in an orderly fashion. Part of the reason could be the pipeline was nearly depleted ahead of the U.S. harvest. Unlike most years, there has been little harvest pressure on prices, possibly due to the lagging progress of harvest in Texas.

In mid-November, the Texas cotton harvest was 20 percentage points behind the state’s five-year average, leading to concerns about a supply delay since Texas is expected to account for about 45 percent of the U.S. crop. However, mostly favorable weather ensued and enabled West Texas farmers to make better progress. Providing fodder for market bulls has been the pace of export sales for the 2016-17 marketing year.

As of Dec. 15, export commitments for U.S. cotton stood at 8.31 million bales, according to the U.S. Department of Agriculture. Consequently, weekly sales only need to average 114,332 bales for the remainder of the marketing year to reach USDA’s forecast of 12.20 million. This was bolstered in the weeks ended Dec. 1 and Dec. 8 when combined net export sales of U.S. upland cotton totaled 716,900 bales. Weekly export shipments, however, have been somewhat slow and need to average 259,844 bales for the remainder of the season. In the week ended Dec. 8, shipments totaled 218,400 bales, up 48 percent from the prior four-week average.

On Dec. 9, USDA released its monthly World Agricultural Supply and Demand Estimate (WASDE) which was construed as bearish because U.S. and world ending stocks were raised. The department raised its estimate of the U.S. crop by 362,000 bales to 16.52 million. Domestic consumption was reduced 200,000 bales to 3.30 million, and U.S. exports were increased 200,000 bales to 12.20 million. Consequently, ending stocks are now pegged at 4.80 million bales compared to 4.50 million in November.

USDA raised its estimate of the Texas crop to 7.40 million bales, a 500,000-bale increase from the November report. The Oklahoma crop was pegged at 565,000 bales, and the Kansas crop was estimated at 71,000 bales.

The world production estimate was raised 960,000 bales to 104.24 million, and world consumption was reduced 80,000 bales to 111.91 million. World ending stocks are now projected at 89.15 million compared to 88.31 million bales a month ago.

Cotton futures traded at the Intercontinental Exchange (ICE), meanwhile, have been confined to a narrow range for months, although there has been frequent intraday volatility. Supporting the market in recent weeks has been the net long position of speculators and index funds. In late November, speculators were 8.5 million bales net long, and index funds were 6.8 million bales net long.

Ahead of the U.S. presidential election, many investors seemed to be moving their money from equity markets to commodities such as cotton. Now, the huge net long positions worry some traders and analysts because of the potential negative impact on futures prices if they are liquidated in large quantities. Most traders and analysts will be keeping close watch on interest rates and the stock market for a clue about what the speculators and index funds may do. The trade also is watching developments in China, India and Pakistan.

The value of China’s currency recently tumbled to an eight-year low which makes imports such as cotton more expensive. There also have been reports of logistical problems shipping new-crop cotton from China’s western provinces to textile mills in the east.

Meanwhile, India implemented a new “demonetization” policy that significantly reduced the supply of currency available for the purchase of cotton from the country’s farmers. Thus, the movement of cotton from farms to the marketplace slowed. Another factor this fall has been rising political tension between India and Pakistan which could limit imports of Indian cotton and increase sales of U.S. cotton to Pakistan.