Cotton supplies at 10-year low
The next monthly USDA update of cotton’s balance sheet in the US and abroad will be issued Thurs, March 9 at 8:30 AM EST. As mentioned last month, into the third quarter of the marketing year (Feb-Apr) production in the northern hemisphere is typically close to its final level and consumption has made the necessary adjustments in response to supply availability via procuring cotton as needed until new crop is accessible. This year is anything but typical especially for consumption as the mixed data is providing fodder for both bulls and bears. Beyond old crop, official data for new crop will not be out until the May 11 report but the Dec 11 contract which best represents 2011/12 season is divorcing itself from the nearby months.
US 2010/11 Cotton Supply & Demand – In the US, unlike overseas, production and therefore supply have been settled although the final ginnings report due out this month might lead to small revisions in the May annual report. At 21.3 mln statistical (480-lb) bales, supply is nearly 3 mln bales above the 2009/10 crop year but as mentioned in past reports, is a 10-year low. As alluded to in the introduction, if this was a typical year, the US would find itself as a residual supplier of cotton to foreign mills but for the first time in recent history, export commitments stand at 99% of the USDA estimate with absolutely no wiggle room for additional sales given the low forecasted ending stocks level. Latest export data after 30 weeks place commitments at 15.09 mln running bales and shipments up to 7.51 mln bales, 49% of the official forecast. If and there always is one, if every bale sold was going to be shipped there would no room for change but as US cotton has shot beyond the 2.00 mark, cracks are becoming more apparent with demand rationing taking greater hold.
Asian mills more so those in China than elsewhere have been successful in passing along the resulting higher price of yarn, cloth, etc due in part to their near absolute control over clients downstream including retailers. Despite evidence from Cotton Inc that suggests the price increase cotton has gone through should only result in very minor increases for retailers, they are being subjected to much higher costs. Since their profit margins are historically thin, they were and are only able to absorb so much of the higher cost per unit resulting in many announcing price increases this quarter. Since the full brunt of cotton’s high price has yet to be passed through, additional price increases are likely although the consumer will have the last say whether they are willing to pay more for 1) all cotton/mostly cotton products due to fiber preference, 2) chose cotton due to its “green” label or 3) accept products with other natural and/or manmade fibers because of price. Hence, US merchants have been able to make modest sales of old crop even at these very high prices but they also encountering a new issue, a few foreign mills are unable or unwilling to price on-call cotton because of its prohibitive cost. Over the past few weeks, the above mentioned cracks with demand have become more apparent with mills from specific countries such as Turkey not pricing cotton already purchased in the last week prior to FND with the March 11 contract or on set-backs as occurred the week of Feb 21-25. Cotlook has mentioned recently the level of hesitation with pricing is fairly high and since Turkey is the second largest buyer of US cotton, their mills’ willingness to price on unfixed contracts is critical. Referencing US export data from the week ending Feb 24, of the 2.22 mln running purchased, 1.02 mln have been shipped leaving 1.20 mln to be shipped if prices cooperate. At this point, it is impossible to say how much cotton sold to Turkey or other countries will not be priced but the direction of US futures has been to the upside and the higher that trend is maintained the more cotton that will not be priced. Merchants have a couple of choices in the event of mills who opt not to fulfill their contract, either take them to arbitration and seek repayment over time or re-sell that same cotton, if possible, although any repayment would be substantially reduced. The on-call report as of Feb 18 showed an increase in May unfixed contracts of 2,194, presumably most of which involved mills rolling March positions forward delaying their pricing decision in the hope of cheaper prices. If those cheaper prices do not prevail, more of the May unfixed contracts, 21,891 as of Feb 25, may be rolled or abandoned. Based on the increased number of problems arising for foreign mills including delivery issues (which is behind the lower NCC estimate), I am lowering my export estimate by 100k to 15.6 mln statistical bales vs Washington’s of 15.75 mln. By the time the May contract has gone into notice, Apr 25, we should know if all of the above mentioned contracts were priced and if not, the consequences for the market. I am also leaving domestic usage at 3.5 mln bales although data in the first 6 months suggest a stronger figure. Similar to foreign mills, those in the US are likely to succumb to the pricing pressures shrinking their consumption by 100K bales vs the USDA estimate. Total demand at 19.10 mln bales is 250K bales below the WAOB figure and if prices continue to remain as high as they are or move higher, some additional loss of demand will occur. Ending stocks are forecast at 2.17 mln bales vs the official Feb 1 of 1.90 mln. As a reminder US and foreign stocks were pegged at the lowest possible level by the WAOB from their November 2010 forward reports and consumption backed out as a result. Fair to say, the pending “showdown” may factor into their consumption forecasts in the last 3-4 months of the crop year.