Due to export sales: Cotton's bearish month ends bullish

A bearish month ended on a bullish note for the cotton market, when export sales of over 500,000 bales were recorded during the last week of November. Sales slowed in the following weeks, however, perhaps because of higher prices.

After the market took off to 54.10 (March futures) on the export sales report, it had a slow decline of 95 points, noted Mike Stevens of Swiss Financial Services, speaking at the Ag Market Network's Dec. 13 conference call. “It pulled right back down to the moving averages, almost to the 50 percent correction on the move off the bottom. Then the market took off and all the bears started turning bullish.”

Export sales declined to 135,000 bales the following week, and climbed to 185,000 bales by the week ending Dec. 7. “The market has run off and left business as far as I can tell,” Stevens said. “I am hearing no reports of significant business being done the last few weeks of the runup.”

Stevens noted that USDA has forecast U.S. ending stocks at 6.3 million bales for 2006-07, a bearish number. “On the other hand, we know that if and when the Chinese come back in, we will return to the weeks of the big exports.”

Carl Anderson, professor, Extension specialist emeritus, Texas A&M University, noted that world production for the 2006 crop is expected to fall about 5 million bales short of use for 2006-07. “But those are very sensitive numbers. Production could go up a million bales and use could drop a million bales, and we could get balanced quickly.”

For now, world stocks have declined, “so we have a little more support under this market than we had a year ago. The world stocks-to-use ratio is about 42 percent, which in the world would put an A-Index around 60 to 61 cents.

Anderson said the market “can make fast changes of 2 to 3 cents up or down. As we see speculative positions switching around, it makes for a very dangerous, volatile market for taking any kind of a risk.

“The good news I see for the market are plantings for next year. We know that grain prices are strong, and we will see more diversification and more acreage shifts out of cotton, 10 percent to 15 percent.

“That's going to help the market some, but when I put these new yield numbers in, we still come up with 20 million to 21 million bales. So we need a market that will export enough cotton to keep working on the carryover supply.”

Anderson believes the planting situation could start to affect the market after the first of the year, “but right now it looks like it will happen later, maybe in March 2007.”

Also to watch, say the analysts, are prices for grains in foreign countries, which also may impact cotton acreage globally.

Stevens noted that speculators will continue to play a role in the cotton market. “For the funds investing in commodities, cotton is cheap by historical standards. From what I understand, there will be a reallocation of weight within the index funds around the first of the year.

“From a fundamental point of view, I can't see new crop December moving over 62 cents. If the funds come in, they could take it higher. But I think the front end of the board and the new crop have more upside.”

“China has a 30-million bale crop and 50-million bale use,” Anderson added. “China is going to need a hefty amount of imports to maintain stocks levels.”

USDA again lowered U.S. domestic use of cotton, but nobody is paying much attention. “The domestic market is not much of factor on the market anymore,” Stevens said. “All you have to do is take a look at people's collars and you see what is happening.”

“We don't see anything that is going to turn around the decline very much,” Anderson said. “In longer-term projections we're looking at 4.5 million to 4.8 million bale of domestic use.”

Anderson says the shift to a situation where 75 percent of U.S. cotton is exported has restructured the cotton market. “We don't have a stable domestic market taking most of our cotton. Instead we have an unstable export market. It's difficult for an economist. We deal with supply, demand and price. Now we have to look at all the political implications, plus supply, demand and price.”

“We can complete with anybody in the world as long as hands don't have to touch the product,” Stevens said. “That's where we fall short. The cost of labor (in foreign mills) is so much less. If you look at the long lines at Wal-Mart you will see that the U.S. consumer is price conscious. We just can't compete.”