Cotton prices have fallen a long way, but could be seeking a floor.
After a long-fall, cotton prices appear to be close to finding a bottom, thanks to good demand and positive news that could affect the cotton market longer-term, according to Kelli Merritt, cotton producer, broker and merchant from Lamesa, Texas.
Speaking at the Ag Market Network’s August conference call, which had almost 750 listeners on its new phone-in option, plus those on its traditional listening options via Internet, Merritt said a big positive for cotton was recent news that China is expected to produce less of the fiber in the future, due to a new price support program that could discourage acres outside Xinjiang Province.
Another positive is that mills worldwide “need cotton right now,” Merritt said. “As the U.S. new crop comes on to the market, there will be buyers. I think that’s one reason why we’re finding a base here in the market. Mills need this cotton and there is demand waiting for it.”
Merritt added that mills are looking for higher grade, longer staple cotton, in part because the huge glut of cotton supply in China is of lower quality which must be blended with higher grades to improve yarn strength.
Another long-term positive is the shrinking spread between polyester and cotton prices, Merritt said. “The market share that we lost to polyester has been substantial, and it’s not going to be gained back quickly. But we’ve stopped the fall, and we’re beginning to climb back. There are some forecasts of a 5 percent increase in worldwide cotton consumption just because of this spread coming together.”
Analysts have said recently that cotton prices of around 68 cents would be necessary to regain blend share, and with prices below that today, Merritt says the shift is starting to occur.
“Another positive is that stocks in the rest of the world and Chinese stocks are closer in price than they’ve been in a while,” Merritt said. “Therefore even with a 40 percent duty, imports are feasible for Chinese mills. This could create demand for U.S. cotton, especially the better quality cotton.”
Merritt says the cotton market is trying to find a bottom, and may be close. “Anytime you see a market fall as hard and as long as this one has fallen, it’s not going to go up nearly as quickly as it went down. One of the technical indicators that worries me is that we don’t see a strong trend line. I think we will.”
Negative factors for cotton include the massive volume of world ending stocks, estimated at 105 million bales. “We just have to work through the stocks,” Merritt said. “Low prices cure low prices.”
As is typical in China, confusion surrounds the new subsidy program, even for China’s own cotton producers. This also weighs on price, according to Merritt, even though it appears that the China may not subsidize its Eastern region, which will likely discourage cotton acres there into the future.
India’s monsoon could have an even bigger impact on cotton prices because it impacts so many bales, Merritt said. “Because the monsoon was late, growers switched acres from soybeans and peanuts to cotton, which is one reason why USDA raised India’s cotton production estimates. But the crop is a long way from being made.
“If the monsoon stays longer than usual and rainfall increases, they still have potential for very good yields, which would make them a net exporter. If it stops in September when it usually does, or if it remains unusually light, they could have lower yields than normal, and they’ll be a net importer. When India is exporting, it is a huge weight on the market. When it is importing, that really helps the market.”
Fund buying should also be expected to push the market up or down, Merritt said. “They’ll always be a factor in taking the market further in either direction than we think it realistically could go.”
Cotton producers have to be patient, Merritt says, but ready to move. “The market could jump up quickly. The market is trading in a range. We can short the top and get long at the bottom, if you want to get long.
“I prefer hedging this crop in March for three reasons. One if you don’t get your crop delivered before December goes off the board, you wouldn’t have to roll that position. Two, December could have more strength than March due to the mills having to buy cotton as our U.S. crop is harvested. Third, we’re close enough to expiration in December, that if you have to hold this position too long, you could lose some unnecessary time value. So my suggestion is to do something in March as opposed to December if you’re going short this market.”
Merritt says a lot of cotton could go into the loan this year, but she advised producers “to not forget about the cotton after you do put it in the loan. Market those equities and watch the market.”
There will be a greater demand for cotton with 35 staple and higher in the fall of this year and next spring, Merritt said. “If you have something than shorter than that, it’s going to be tougher to market because there’s not a demand for it. So just keep that in mind as you’re making your marketing decisions.”
O.A. Cleveland, professor emeritus, Mississippi State University, says despite China’s stockpile of cotton, it will continue to be a good customer for the United States. “The bias has been such that the Chinese stocks were so huge and so large that China didn’t need any cotton. But the truth is that China needs huge volumes of cotton. USDA has them at 8 million bales of imports this year. I think we’ll see imports larger than that simply because they have to have quality cotton.”
That cotton will come from Australia, Brazil and the United States, Cleveland said. “They have to get those high grades to mix with their cotton. I think when everything is said and done, we will see that the Chinese be in the market for cotton, but will be there as a stronger force than we anticipated.”