AUSTRALIAN COTTON SHIPPERS ASSOCIATION (Member of the Australian Peak Shippers Association - APSA)
Having been in the cotton industry a few years, one of the things that keeps you constantly engaged is the fact that no two seasons are the same and that there is always a different challenge to overcome. The Australian 2017 crop is certainly providing us all in the industry with a number of challenges.
Optimistic estimates a few months ago, and I was among those, were placing the 2017 crop in a potential range of 4.5 to 5 million bales and yet here we are at the start of July wondering just how much below 4 million bales we will be. Less supply coupled with a more variable quality crop means that we have a very tight quality position and that has definitely been reflected in basis levels over recent weeks as shippers struggle to source their requirements. Likewise, spinners who thought a few weeks ago that they would be able to source Australian cotton through until the arrival of new northern hemisphere crops are getting an unpleasant surprise when they seek offers and can't find them.
The Australian situation has contributed significantly to the current tight global supply position and the market is faced with a dry pipeline until at least the end of 2017. This is due in no small part to the outstanding US export sales during the year. Not only have they virtually sold out of the 2016/17 crop, new crop sales have already reached 4.3 million bales compared to 1.89 million bales at the same point last year so any early new crop availability is most likely already spoken for.
Why therefore has the futures market declined on such a situation? Put quite simply the speculative long positions have decided it is time to get out of the cotton market and their wave of selling has pushed the market lower. Recent years have seen increased participation in our market by hedge and speculative funds, much like all other markets, in turn that produces is a wider range in price movement and that's what has happened in the last couple of months, first higher and now lower.
This is the time of year in the global cotton calendar when weather aspects come into play as all the large northern hemisphere crops have been planted and the growing conditions get plenty of attention. For the 2017/18 international crop year the expectation is that the world will produce a lot more cotton, estimated in the most recent USDA report at 114.73 million bales, compared to 105.99 the previous year, however what happens if those crops experience problems and we don't get that production? Developing crops in India, China, USA and Pakistan are now going to determine if the current bearish conditions are sustained through large production or alternatively crop problems help a price recovery.
India, which has now been the world's largest producer for three years in row, appears headed for a large crop with their cotton association predicting a crop around 37.5 million bales (170 kgs) This converts to 29.3 million statistical bales compared to the current USDA estimate of 28 million. Producing nearly a quarter of the global crop India is very important to watch and no doubt we will be hearing about the monsoon progress or lack of it in the coming weeks.
End June saw the release of the USDA planted acreage report and this produced something of a surprise because the number came in lower than virtually all estimates. Prior to its release industry had been projecting a range of 12.25 million to a potential high of 13 million acres but the reality was somewhat different. Total upland acres were placed at 11.8 million acres, an increase of 19.48% on last season while ELS acres increased 29.6% to 252,000. Overall the USA is thought to have planted 12.055 million acres representing an increase of 19.7%. Now we just need to see how the Texas crop progresses because it represents 56% of the upland crop and is grown in the most variable area of the cotton belt. Over the coming weeks we will hear plenty of comment about what is happening with this crop and it certainly can be a market mover, in either direction!
Of course, the usual major question for traders to answer is what is happening and what is going to happen in China. I have just returned from the Chinese International Cotton Conference held in Chongqing, Sichuan Province and it's fair to say that the mood at the conference was upbeat and from all reports much better than the previous couple of events. What does this mean? There is general consensus that more imports are going to be needed - it is a question of when. Certainly the sale of government reserve stocks continues at pace, currently standing at 1.7 million tons, or 7.8 million bales and this is rapidly reducing the amount of stock. Throw in questions about quality availability and it appears that a favourable situation is developing for additional cotton imports.
The good news story from all of this is that cotton demand is increasing globally and just as importantly in our major market of China. Let's hope we get some rain in the coming weeks and can grow a sizable crop to keep our customers happy.
Cliff White
Vice Chairman
July 4, 2017