WHILE mid-term election mania in the US has been dominating the press, cotton is battling its own set of “mid” challenges.
Currently mid harvest and mid trade war, polling on the US cotton market is changing day by day– with some fairly major swing factors as to which way prices might go.
So far, the US harvest is progressing at an average pace – 44 per cent complete at the end of October.
Hurricanes Michael and Florence have seen some forecast yield reductions in Georgia and Alabama and some rain damage in the Carolinas, but overall the losses that have been factored in to date have had a modest impact on the national US crop forecast.
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The US crop still looks like it will push through 19 million bales, down on last year, but the second-largest crop in the past decade and with plenty of fibre still available to support the big export year anticipated in the market. Export sales to date are up nine percent compared with last year and the highest level for this time of the season since 2010.
The pace is slowing though and the trade war – along with emerging market currency risks and slowing global cotton demand – all provide risk factors for some not-so-smooth sailing for cotton.
The uncertain trade relations with China have started to reveal themselves in practical terms for US cotton with the first negative export sales week for the season recorded at the end of October.
The negative territory was driven by Chinese cancellations of 88,000 bales of upland cotton.
China’s growing appetite for cotton imports – which Rabobank forecasts will lift some 15 to 20 per cent this season as stocks continue to fall domestically – is seemingly not going to be fed by the US this season.
It is an evolving situation however and the cotton market is responding to developments in this space as they come to hand.
Trump’s Twitter announcement of progress towards a trade deal with China’s President Xi helped push the December cotton futures contract up US3 cents a pound from US76.8c/lb to US79c/lb in the day on November 1.
At the very least, the current situation will almost certainly have implications for trade flows in 2018/19.
As, although discussions appear positive, it is difficult to believe the trade nexus between Trump and Xi will be resolved quickly, if at all.
If not China, South East Asia and beyond must pick up the slack for US-origin cotton.
While this is not unachievable, ongoing risks to emerging market economies could hamper demand in key markets and should remain a watch factor.
At the end of the day though, overall global demand is a critical swing factor with some more modest growth forecast in the 2018/19 season than the past two years.
Rabobank’s forecast is for three per cent annual consumption growth.
While these swing factors should be monitored, Rabobank’s view is for ICE#2 prices to remain in the current high US70c/lb range through until the end of the year.
With northern hemisphere crops far from being in the bag just yet, further downside revisions to production in the US, India or China itself would be favourable for prices.