Cotton Market
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Bulls and bears may tangle in 2018 cotton market arena

Reasons for optimism in cotton market outlook, but some bears in the mix.

A few bulls and a bear or two may bellow and growl at each other about which will dominate the cotton market through 2018, as production, consumption, and competition from other countries and man-made fibers exert varying degrees of influence.

But from a supply and demand outlook, says Jarral Neeper, Calcot, Ltd., “I don’t see a very bullish picture.” However, the president of the Bakersfield, Calif., cotton marketing services cooperative said at the Beltwide Cotton Conferences at San Antonio, not all is gloomy. Among the bullish factors he cites:

• The world economy is good.

• Environmental concerns are being addressed by the cotton industry.

• Polyester prices are rising.

• Another round of money-chasing includes more commodity buying.

• Potential exists for stocks adjustments in China and India.

In the bears’ favor, he lists these points:

• U.S. stocks pose a challenge.

• Market share in the export market may be difficult to maintain.

• Will the commodity funds turn bearish?

 PRICE OUTLOOK

For now, Neeper sees speculators staying with cotton. “They are happy with cotton, and see no reason to sell.” December 2018 futures could break above 73 cents, he says. “I think a lot of selling will take place at 75 cents. We probably need a cooling-off period before we see prices go much higher.”

He expects U.S. cotton acres to increase by about 3 percent in 2018, to 13.1 million. Southeast and Mid-South acreages are expected to increase slightly, possibly reluctantly, as producers look at cotton as an expensive crop to grow, but see no profitable alternative. Southwest acreage — Texas, Oklahoma, and Kansas — will increase a bit more, and Far West acreage will see slight increases.

“We see a lot of enthusiasm for cotton, a result of disappointing opportunities for alternative crops,” Neeper says. The production estimate for 2018 is 21 million bales, and he anticipates higher-than-usual abandonment as producers go into the planting season with limited moisture.

Export projections are for 15.5 million bales, with 3.5 million bales of domestic use, for a total consumption of about 18 million bales. “That will add about 2 million bales to the U.S. surplus,” Neeper says, which will mean a 7 million to 7.5 million-bale ending stocks number. “Not a very bullish picture.”

World plantings will be down 3.5 percent, as India transitions acreage in a key cotton production area to food crops. India’s plantings could drop from a historical 12-12.5 million hectares range (29.6-30.8 million acres), to 10.5-11 million hectares (25.9-27.1 million acres). Overall, world yields will remain flat to a little lower.

 WORLD PRODUCTION/CONSUMPTION

World cotton production for 2017 is estimated at 120 million bales, with consumption estimated at 119.6 million. “All major players show improved production,” Neeper says. But India’s 29.5 million bale estimate may be optimistic. Production issues within India’s major cotton areas show significant yield decreases, attributed to insect pressure and other factors. “Instead of 29.5 million bales, some estimates suggest 28.5 million, 27.5 million, and some have gone as low as 24 million bales.” Also, bale weight may be a lot lighter than the assumed 170 kilogram (374.7 lbs.) benchmark.

Consumption remains below production levels, but the gap is narrowing. The 400,000 bale difference is “a significant improvement over last year,” he says. “We are moving in the right direction.”

Exports remain by far the top market for U.S. cotton, Neeper says. To meet the U.S. export sales goal of 15.5 million bales will require selling 150,000 bales a week. “We will need 16 million running bales to achieve 15.2 million actual bales. We typically deliver 94 percent of what’s sold.”

The cotton market has improved, he notes, in spite of less-than-bullish supply and demand figures — a 5.4 million-bale estimate for ending stocks, compared to 2.8 million last year. “How close are we to 80 cents a pound? We’re not quite there yet, but we have a bearish supply and demand outlook. Where can the market go?”

He sees price resistance around 80 cents, and doesn’t expect prices to get to 85-87 cents. “It probably won’t get there.”

But if it does, the next target would be in the upper 90-cent range. “I don’t think it will get above 90 cents. But it could possibly go there — anything is possible.”

Mills are sitting on a lot of cotton, bought on call, expecting “prices to go nowhere but lower,” Neeper says. They are hoping for a price break, somewhere in the low 50-cent range.”

He suggests that producers looking for some market risk protection might want to consider buying a put at 2 cents to 4 cents per pound. “That can protect producers with a 70-cent floor.”

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