Based on world ending stock estimates, cotton prices should be lower than they are.
John Robinson, TExas AgriLife Extension cotton marketing specialsit, expects no cotton rallies.
The general economy also plays a role as consumers tend to buy more clothing in a strong economy. Robinson says the country is no longer in a recession but issues still linger. Unemployment remains too high and the gross domestic product, at 2 percent, does not indicate strong growth. “We see no booming economy and don’t expect one within the next 12 months. So, we don’t see support for cotton demand. We see nothing for cotton that’s bullish.”
Except. “Export sales have increased the last few weeks following a slow December. Maybe there is more demand that we thought. We’re getting mixed signals. Still, overall, I don’t see a demand-side pull for cotton.”
Other external forces also affect cotton prices. Hedge funds and speculators move cotton prices with no real signals from supply and demand. Funds also create price volatility in the futures market as they get in and out over a two or three day period or within a week or two. “We saw a lot of fluctuation with hedge fund sell offs in 2013.”
Robinson says two types of funds play in the cotton market and have different influences. One segment buys and holds, often controlling a significant number of bales and influencing demand for cotton futures.
And trend buyers get in and out with nearby futures. “They watch trends and buy into the market and may be out again in two or three days. The market goes up and down as they get in and out.”
He said after Christmas these funds got back in the cotton market and created a rally. “The funds’ influence comes and goes and sometimes actions are based on factors that have nothing to do with cotton.”
The real joker in the deck remains China and what it decides to do with the reserve. An unexpected move could send the market down significantly.
Robinson says USDA has speculated that China had two goals to build the government reserve. The first is they did not want to run out of cotton and leave their huge textile industry short. The second factor was to “keep peace with growers.” They bought cotton to set a floor and support their growers. Consequently, they have artificially supported the world price for several years.
Since they bought the high priced cotton, they have bought and sold several times—for a small loss—and released it to their internal markets.
Even with those sales, “they still have a large surplus, 42.6 million bales with 15 million free to market.”
They could dump that reserve but Robinson doesn’t think they will. “They are changing their policy and moving away from high loan rates to a target price and paying a subsidy to growers and will stop adding to the stockpile.
“But what will they do with that reserve? If they dump it, they lose too much money and they lose face.” If they don’t sell it they lose money with storage costs and also reduced quality. No one knows what they will do, but they may be replacing old cotton with new to maintain quality, Robinson said.
China will take a loss on these bales, regardless of what they do. They lose if they auction it off and they lose if they continue to hold it.