The cotton market is not paying much attention to fundamentals, but the speculators, funds and money managers are — or at least they think they are.
Cotton prices rose significantly in October, likely on weather disturbances at cotton harvest, a new 14-month low in the value of the dollar and strong outside markets, despite the fact that U.S. cotton is not moving out of warehouses.
“We’ve gone off and left world prices far behind,” said Mike Stevens, with Swiss Financial Services. Cotton is moving globally, but it’s the foreign growths that are moving. Right now, we’ve priced ourselves right out of the market, and moved the United States into a position as residual supplier.”
Cotton export sales for the week ending Oct. 15 were 31,000 bales, down 47 percent from the week before and a marketing year low. For the same week last year, export sales were 315,000 bales.
“U.S. exports are suffering and have been since the start of the marketing year, and no one seems to be paying any attention,” said Sharon Johnson, senior cotton analyst with First Capital Group, Atlanta, Ga.
Johnson noted in mid-October that Pakistan “has sold 400,000 bales in the past 10 weeks, and as that represents what the USDA thinks they will export for the marketing year, they are pretty much done.
“Although that may sound bullish, we have to remember they are 10 cents cheaper than the United States, and freight is less expensive as well. India is 5 cents cheaper, so traditional U.S. buyers will simply walk across the street for their cotton needs and still save themselves a sizeable amount of money.”
Export sales are apparently of little concern to speculators, noted Stevens. “Money flows to winning trades. When speculators get up in the morning, they have no bias about cotton. All they want to do is be on the right side of the market. Cotton is a small fry to them.”
Stevens says the lack of faith in the U.S. dollar globally “has created the mindset from outside markets to own things. We’ve seen the same thing in gold.”
The proof is in increasing open interest in cotton futures, Stevens says. “Since open interest in the cotton futures bottomed out on June 24 of this year at 55 cents, fund managers have slowly begun accumulating cotton futures. By Oct. 21, open interest had gained 67,727 lots. However, a whopping 43 percent of that increase has come in just the previous 12 sessions.”
Adding fuel to the fire is that money managers “are reading what’s going on in cotton country, with delayed harvests, late-maturing crops and deteriorating quality and believe the fundamentals are now solidly behind higher cotton prices.”
The recent developments “have gotten the money managers lathered up,” Stevens said. “They’re not forcing the market up, they’re just positioning themselves. The trade is being overwhelmed and is unable to hold the market back.”
It’s put hedgers in a tough position, according to Stevens. “Domestic mills are having a tough time defending themselves against higher prices. They’re buying hand-to-mouth when they can. That has worked over the last few years, but it could come back and bite them.
“It’s my understanding that foreign mills are starting to reduce their mix, cutting cotton back a bit and adding in synthetics.”
Johnson added that at some point “futures will realize the problem with demand and will correct in a very meaningful way, although it may be with the March than with December.
“I have seen a lot of market run-ups that got everyone excited about the potential for even higher prices, but as of mid-October, today’s higher prices are doing some very real long-term harm.”
Stevens said commercial trade participation in the futures market “is the lowest I can remember in years. First of all, we don’t have as many players because we’ve lost so many. And those still there are still nursing wounds from last year, and they’re still gun shy. Mills and producers are still using options. They’re tailor made for this because they don’t carry the kind of risk in the futures markets.”
While producers are often blamed for being short on marketing skills, “the fact is that the futures markets can make gigantic moves, while what producers get for their loan equities doesn’t move hardly at all,” Stevens said. “They wind up not being able to get maximized returns through standard marketing practices.
“That’s why a lot of cotton producers move their cotton, then own a call. Then if the market goes to 75 cents, they can participate every step of the way. They wouldn’t be if they carried all the risk of their own cotton.”