Shipment delays threaten cotton carryover and prices

Global Cotton-Textiles

Cotton slugged through another week in its new but lower trading range, most likely forever saying goodbye to the 121-cent high. The new objective now for the March/May/July contracts is 115 cents with an outside chance at 117 cents, but that is not likely in my book.

The old crop contracts should defend the 103 to 105 cent lows in the absence of major export cancellations. Unfortunately, I am one to worry about export cancellations, but USDA did not see any in its December supply-demand report. China did have minor cancellations this week but had much larger purchases. Yet, the cancellations were at much higher prices than sales made last week. I fear more cancellations. Yet, China does need U.S. cotton.

Figure: The major problem facing U.S. exports does not price, but rather obtaining vessels on which to export the crop.

Too, given the very high quality of the U.S. crop across the Belt, the 2021 crop will remain in excellent demand. The major problem facing U.S. exports does not price, but rather obtaining vessels on which to export the crop.

Obtaining enough tractor-trailer rigs and vessels to move U.S. cotton is a significant stumbling block to holding prices above the dollar level. If the U.S. can’t export, then cotton supplies will stack up at the warehouse, adding to U.S. carryover and pressing U.S. old crop prices lower. In turn, that will act to pressure the new crop December contact lower as well.

New crop prices will have enough pressure to deal with later in the winter as 2022 planting estimates are analyzed by the market, maybe 15% to 20% higher than in 2021, just in the U.S.

The bullish luster of the on-call sales vs. on-call purchases ratio remains squarely on the side of the bull.  Yet, it is not as strong as it was two and three months ago when prices took on the challenge of the teens and into the low 120s.

As of this week’s report, on-call sales show that some 12.4 million bales of cotton must be bought in the futures market by textile mills between now and mid-June. Likewise, growers have 1.9 million bales of on-call purchases that must be offset by selling futures before mid-June.

The buying of futures continues to dwarf the required selling of futures by some 10.6 million bales. The bullish sentiment of on-call sales remains in the forefront as the price of the bulk of U.S. export sales currently being made are not being fixed.

Textile mills remain bearish (as they always are, just as growers tend to always remain bullish) and are delaying fixing the price until between now and mid-June.

For example, literally, I receive messages each evening asking, “Will the price be lower tomorrow?” Thus, most of the export sales are being made without the price being fixed but with the commitment to fix the price later. As this gets overdone and on-call sales grossly exceed on-call purchases, prices move higher.

U.S export sales have again become very brisk with China, Pakistan, Turkey, Vietnam, and Mexico leading the way. These countries will remain as the primary buyers and will include other Southeast Asian countries throughout the marketing year.

The concern, as mentioned, is shipments. Shipments (weekly and total accumulated) continue to greatly lag historical patterns as the world supply chain crisis has severely strained the world’s ability to exchange raw materials and finished/manufactured goods. It is all a guessing game of hoping and wishing that U.S. cotton can get to the port and be shipped out.

Weekly shipments of U.S. cotton must dramatically increase if there is any hope of reaching the USDA estimate of 15.5 million bales – a number USDA continues to use, even five months into the 2021-22 marketing year. However, the first five months’ data (August-December) predict shipments as low 14.5 to 15.0 million bales.

Some are suggesting that U.S. shipments will fall as low as 14.0 million bales. The dilemma is clear – mills are buying cotton, but will it get shipped? And again…if it does not get shipped, then U.S. carryover begins to act as a drag on 2022 crop prices.

Too, the December 2022 futures market is facing a world acreage increase of 8% to 12% and U.S. plantings increase of 15% to 20%. The exports desperately need to move.

USDA’s December supply demand report was little changed both for U.S. and world estimates. While slight changes were made for several countries, the Pakistani crop was reduced by 1 million bales just after being increased to the same 1 million about two months ago. U.S estimates were essentially unchanged. Yet, I contend U.S. domestic should be increased 150,000 bales and U.S exports should be reduced at least 500,000 bales.

The world crop was estimated at 121.6 million bales – down 200,000 on the month. World production was increased to 124.3 million bales, up 200,000 bales from November. World carryover reduced some 1.2 million bales due to changes to beginning stocks, a reduction in production, and an increase in consumption.

Those holding crop until the new tax calendar year should still be able to receive 100-105 cents, basis March. Many analysts feel December moves to a 93-95 cent trading range. Unfortunately, I do not share that enthusiasm, but do hold the 87-90 cent range. Let’s hope they are correct. The market will find excellent support from on-call sales.

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