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'Low Prices cure Low Prices', appropriate for cotton markets

01
Nov '08

Dr. O.A. Cleveland comments on cotton market: How appropriate: New York futures make life of contract lows on Halloween, a U.S. holiday celebrating fictitious spooks, goblins and witches. The saying: "If you live long enough you will see everything," must be true.

With nothing else to do but stare into the eyes of a growing Chinese crop and a sharp drop in Chinese textile spinning, the cotton market fell to new life of contract lows this week. Nevertheless, the market's rapid fall is slowing. Yet, the only positive comment I can offer is that the market will get better, sometime, if we can just live long enough. At some point the market axiom, "Low Prices Cure Low Prices," will kiss us and make us all feel better. Again, if we can just live long enough...

Most likely, we continue to look at eighteen to twenty-four months before the market can build above 60 cents, basis the nearby futures contract. Typically, one growing season would be all that was required to right the listing ship. However, given that the worldwide decline in income is so sharp, the cotton market could face two full crop growing seasons before righting itself.

We only have to look at the weekly export sales report for evidence. Net export sales for the week ending 10/23/08 were a measly 58,000 RB. Upland sales were 57,100 RB and Pima totaled only 900 RB. The primary buyers were Mexico (11,400 RB); Indonesia and Turkey. Note the total absence of China, the big boy of textile consumption. (Actually China was notable in the report---for a very large cancellation of a prior sale.) Cotton prices were in the high 40's, basis New York and China was only a very small buyer. Their textile slowdown is evident; they did not need cotton, not even at 47 cents, basis New York. The limited Pima sales were all to Turkey.

Shipments, expressed in terms of raw numbers were okay, but nothing near what the U.S. was expecting as recent as just a months ago. All cotton shipments totaled 250,100 RB with Upland exports at 249,100 RB and Pima exports at 1,000 RB. The primary destinations for Upland were China (46,800 RB); Indonesia and Turkey. Typically, the larger buyers, week after week will include China, Indonesia, Mexico Turkey and Bangladesh. Vietnam has also become an important market for U.S. cotton. Hong Kong (800 RB) was the primary destination for Pima with Indonesia taking the other 200 RB.

Sales of Upland cotton are about 1.1 million bales great that at he same time as last year. Yet, shipments are actually 300,000 bales less than at the same time as last year. Most of the sales were made at much higher prices and well before mills sensed there was a textile slowdown on the way. Coupled with the slower rate of shipments, this is just another chapter in the book explaining why U.S. export sales will continue to be low, even at lower prices; mills are already well ahead of needed purchases.

With the U.S. having two of the five growths now in play for calculating the AWP, the thought is that the AWP will drag New York lower unless other growths decide to undercut U.S. offering prices. Either way, the market is easing lower--not falling lower-in the very near term.

With the U.S. projected to build its carryover up to 13 million bales during the 2009-10 marketing year, it does appear it will take two crop seasons to find a cure for low prices. The U.S. will continue, for at least another five years, if not forever, as the supplier of last resort.

O.A. Cleveland

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