THE world cotton price has had a very strong start to 2018, building on the rally in late December with the nearby Intercontinental Exchange number two tipping US80 cents a pound in the second week of January.
This has meant, despite the strengthening of the Australian dollar, underlying futures prices in local dollar terms reached more than $500 a bale and physical offers have hit levels above $550/bale.
The market is being supported by a number of factors that are outweighing the influence of the still-sizeable US crop and the global stock building outside of China this season that was expected to have a bearish influence on the market through the fourth quarter of 2017 and first quarter of the new year.
Two factors contributing to the strong cotton prices through the holiday period are speculators who have built a large net long position, while there also remains a big number of on call sales (cotton for which the price has not yet been fixed by mills).
Both these factors are likely to remain supportive for the ICE#2 in the short term, particularly as we move toward the March contract notice period.
Also supportive of recent cotton prices have been strong US export sales, which have maintained US export estimates, and continued bullish global consumption figures.
These two factors are both seemingly positive for prices further into 2018, however are not without some potential risks brewing.
The very positive estimates for global cotton consumption growth in particular will be interesting to monitor, as only time will tell if these can withstand the increase in cotton prices.
In the midst of this price rally, on January 12, the US Department of Agriculture (USDA) released a mostly neutral World Agriculture Supply and Demand report.
However, they did further lift their world consumption forecast to 120 million bales in 2017-18, which would be 5.3 per cent growth on 2016-17 estimates and, if achieved, the highest level of consumption seen since 2007-08.
While positive world economic growth forecasts remain supportive for improved cotton consumption, the risk is for cotton’s competitiveness to be dented by the recent price increases.
The Cotlook A price index is up 10 per cent through the last month while the PCI Woods Mac synthetic price indicator steadied in December 2017 following its sharp improvement through 2017.
This price ratio will be important to watch.