2017-03-15 / Farm & Ranch


A significant news week affects Cotton Market

March 9, 2017

Cotton had another week full of big news as the market digested the commencement of China’s reserve auction and the release of USDA’s March World Agricultural Supply and Demand Estimates (WASDE) report. As one would expect with so much information coming out over such a short time period, futures prices whipped back and forth quite a bit. Last Friday, May futures made a 76.66 low then rallied 280 points to a high of 79.46 on Monday. May prices backed off the high, making several sharp moves in alternating direction over the next three days. In contrast, December futures actually made a new high at 75.54 Thursday. Despite large intra-day movements in the front of the market and a lot of concern about increasing U.S. cotton acreage, December futures have been remarkably steady.

What had the market making such large moves? As already referenced, the start of China’s reserve auction was closely watched, but there seem to be as many interpretations as there are commentators. The facts are that the auction began Monday with an offer of 30,000 metric tons ( roughly 135,000 bales), all of which were purchased at a relatively high price. All of Tuesday’s offering and nearly all of Wednesday’s also were purchased but at a lower price each day. Because of the strong offtake, Thursday’s offering was increased to 32,000 metric tons, and 97 percent was purchased but again at a lower price.

The dominant initial interpretation was bullish. It seems the first day’s strong price and total offtake convinced both the Chinese and U. S. futures markets that demand was especially strong. Consequently, the futures markets rallied. By the second day, following the lower average price for auctioned lots, China’s prices had begun to fall in both their futures and spot markets. The price decline may have just been undoing the over- reaction of the spike higher or a response to government comments about tightening credit for commodity speculators. However, a very different interpretation of the auction quickly emerged. By Wednesday, some analysts were predicting that the release of auction stocks would flood the Chinese market and depress prices.

Neither interpretation of the auction is deeply convincing. While China’s consumption is very strong, it seems doubtful mills will chase the price higher with such a steady supply on offer. Also, the auction has a floating reserve price below which it will not sell, which means supplies will not flood the market at any price. Additionally, Chinese mills likely need all of the cotton to be released. China’s production is estimated at 22.5 million bales, and consumption is expected to total 36.25 million bales. That leaves 13.75 million bales of shortfall to be covered by 4.5 million bales of imports and 9.25 million bales that will have to be purchased from the auction. In short, China’s auction is unlikely to flood their market in the near future.

While it is possible the auction could push Chinese prices lower, the auction should have relatively little effect on the rest of the world’s supply and demand. More specifically, demand for U.S. cotton is much less dependent on China than it has been in years past. This week’s U.S. export sales report showed net new sales of 248,900 Upland bales for delivery before July 31 and an additional 215,500 bales for delivery in 2017-18. Indonesia was the largest buyer of old crop at 68,400 bales followed by China ( 42,200) and Turkey (36,400). Nineteen different countries bought cotton, showing the breadth of demand and the competitiveness of U.S. cotton versus current price for alternative growths.

Thursday’s WASDE report was mostly as expected.

USDA increased its U.S. 2016-17 production estimate by 270,000 bales to 17.23 million. At the same time, the strong U.S. export sales gave USDA plenty of confidence to increase the estimate of U. S. exports from 12.7 million to 13.2 million bales. Domestic consumption was unchanged which left a net decrease in the U.S. ending stocks estimate of 300,000 bales to 4.5 million. There were several small changes to the international balance sheet, mostly involving the decrease of competing countries’ exports and increased imports in India, Indonesian, and Vietnam. Pakistan’s and Turkey’s imports were reduced 50,000 and 350,000 bales respectively. The main takeaway from the report was stable world consumption and tighter U.S. ending stocks.

There is little cotton specific news expected in the next few weeks. Traders will be keeping their eyes on the export sales figures, but the next big focal point will be USDA’s prospective plantings report which is slated for release on March 31. However, broader market news for this week includes the Federal Reserve’s meeting of the Federal Open Market Committee (FOMC) which will be followed immediately by an announcement regarding interest rates. Most expectations are for an additional hike this month which has the U.S. dollar trading higher. Further increases in the dollar and interest rates could pressure commodity markets lower, including cotton.

In the spot market, producers sold 13,306 bales on The Seam’s online trading platform in the week ended March 9. Average daily prices ranged from 70.09 to 74.17 cents per pound. The average gross premium was 20.97 cents per pound, and at week’s end, less than 15,000 bales of 2016-crop cotton from Texas, Oklahoma and Kansas were offered firm on The Seam by producers.

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