The lack of strength in cotton prices in early March shows how the behavior of a big player, in this case China, can affect U.S. markets, even when the fundamentals indicate higher prices.
In March, USDA estimated a 400,000-bale increase in U.S. exports and a corresponding drop in U.S. ending stocks. USDA said the export hike was based on higher forecast demand for – who else – China. Much of the expected increase in imports could be filled by the United States.
Still, prices were considerably lower than what most analysts thought they would be. “Looking back, prices peaked during the first week of February, then drifted lower,” said Mike Stevens, Swiss Financial Services, Mandeville, La., during the March 14 Ag Market Network teleconference. “Traders had thought that by the end of February, prices would pop back up to the upside.”
Stevens noted that “traders were accustomed to hand-to-mouth buying from the foreign mills due to generally weak yarn markets, but were comfortable due to the underlying demand.
“However, demand in a number of markets toward the end of February was starting to look lackluster. Some credited the Chinese new year, some the lack of any official announcement regarding additional import quotas.”
The bottom line is that a big player was again dominating the markets. “We have worked our way into a corner where everything begins and ends with China now and it could be that way for the rest of our lives.
“Our biggest problem seems to be the tremendous amount of cotton shipped to China on consignment, cotton that went without a sales contract. The presence of these large volumes of consignment cotton began to take its toll on their domestic cotton prices.”
Chinese domestic prices, which have been considerably higher than imported cotton, began to decline and it was concerning some merchants with inventory there.
“When China’s biggest mill, which uses about half of what the U.S. domestic textile mills use annually, started backing off, it encouraged virtually all China’s mills to back off. Mills and merchants who had standing orders in New York to buy on 2-cent breaks began to back off as well.
“By (early March), we were seeing prices we hadn’t seen since before Christmas and the speculators continued to sell the market. Our market has gone down not on long liquidation, but on the new speculative shorts.”
While there may still be more adversity ahead, demand for cotton is still strong, according to Stevens. “Some of the mills have scaled back, but the ultimate outcome is that they are still going to buy the cotton. They may not like the yarn prices and may not be as profitable as they like, but they’re going to keep their doors open.”