What is in this article?:
- China a big player in global cotton market
- Drop in U.S. acreage
- If China moves 15 million to 18 million bales of domestic and imported cotton into its strategic reserve, which appears more and more likely, it could create a synthetic tightness which could be positive to prices.
Drop in U.S. acreage
“At current levels, we could lose as much as 15 percent to 16 percent of cotton acreage in the United States. But cotton prices do have the opportunity to move back up, and that could bring in a little more acreage. For that reason, we’re looking at a 10 percent to 12 percent drop in U.S. acreage.”
A rise in global cotton yield could offset a portion of the loss in acreage, noted Quinn, and result in a decline in world production of around 6 percent. “That would give us a 114 million to 118 million bale crop and 112 million to 116 million bales of mill use. But we have to keep in mind what China is doing. Higher ending stocks do not bode for bearishness if the Chinese continues to do what they are projected to do.”
Other bearish factors include demand destruction hangover from high prices in 2011, according to Quinn. “Mills have been running finer count yarns to reduce the poundage running through their mills. And there still is some higher price cotton in the supply chain – the pig has not gone completely through the python, there’s still a big lump there. Somewhere in the supply chain, someone is going to have to take a hit on that cotton. It’s still priced too high. It can’t simply make its way into a retail product.”
More bullish factors include ongoing weather concerns and the fact that supply chain inventories are relatively low. Quinn noted that demand “is going to have to pick back up and when it does, there will have to be some building of inventories, and that’s always good for near-term price activity.
“There are also reports that Pakistan may also buy some of its internal crop to support prices inside Pakistan. If that takes place, that’s more cotton that is moved off to the side and is not available to the international markets.”
One technical positive in early January was when March cotton futures “traded above the downward trend line, something it had not done since June. If it closes above that trend line at the end of the week, that will get the funds to notice cotton again. In fact, I already think they have. The specs have gone from relatively flat in the cotton market to 5 percent net long in the last two weeks.”
The speed of information continues to have an impact on how commodities are traded, noted Quinn. “Money flows much faster than it ever has in history. It’s no longer placing phone calls to make sure you get things done. Millions of dollars can flow around the world, into any commodity or out of any commodity at the click of a mouse.”
Quinn says if debt crises around the world are worked out in the coming year without major disruption, it will help put a floor under commodity prices. “I do think they will figure it out, and economic activity will pick back up. If we do start seeing sovereign default and European banks fail, there will be contagion, and there will be very disruptive problems in the system. Then all of a sudden we’re in a new ballgame.”