What is in this article?:
- Donâ€™t wait on better cotton prices, use market
- Demand for U.S. cotton picking up
• Cotton prices are holding steady, but may improve somewhat on bullish developments.
• Analysts urge cotton producers to consider selling physical cotton and buying it back on the market, rather than holding cotton and waiting for higher prices.
• China continues to be a major player in the market these days, with its government looking to focus less on cotton and more on food crops.
If you think cotton prices are headed higher, think about selling physical cotton and buying it back on the board rather than waiting out the market, says Kelli Merritt, Lubbock, Texas cotton farmer, broker and merchant, speaking at the Ag Market Network’s November conference call.
Merritt’s advice is based on significant uncertainty in the world cotton marketplace coupled with the possibility of some bullish news from India and China.
“We’re waiting to see if India is going to be exporting enough cotton to be a constant competition to the U.S. crop,” Merritt said. “We’ve heard rumors that USDA has over-estimated their stocks by as much as 3 million to 5 million bales.”
In addition, “The Cotton Corporation of India has announced they are going to buy 27 percent more local cotton than in the past three years. We in the trade keep anticipating that India is going to dump all this cotton and keep prices suppressed, but the evidence seems to be mounting that they’re not going to do that. If they actually export substantially less cotton, it will give the market some support.
“The other big elephant in the room is China. So far this year, they’ve bought roughly 10 million bales and they’re still steady buyers. We don’t have a grasp of how long this will continue. It’s nice now while it’s happening, but who knows when it will stop. If it stops suddenly, that could really take the breath out of this market.”
More possible bullish news is China’s purported plans to start subsidizing food crops instead of cotton, “and that’s going to change everything,” Merritt said. “Much is being written that this is the year they’re going to do that, and once they get all the cotton they want in the reserves, they will totally focus on food crops, and leave cotton.”
Merritt noted that many of China’s textile mills are closing and moving to other parts of Asia, resulting in increased export sales to those countries as well as an increase in yarn imports back to China.
“Some of this seems to be cyclical changes in the industry that occur over time,” Merritt said. “There is cheaper labor in these developing countries so the industry shifts to where the cheaper labor is, like it did when it shifted from the United States to China.
“Hopefully some of these adjustments will result in more demand for cotton yarns and we will see cotton gradually win back some market share that they lost to man-made fibers during the price volatility of 2011.”
Spinner margins are also improving, according to Merritt. “The price run-up in 2010 hurt spinners. They thought there was no end in sight to high yarn prices, so the high cotton prices didn’t bother them. But after the selloff, there they were with inventory that they had invested huge input costs in, and they couldn’t sell it for (the right price). The market is finally starting to come back to them.”