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News on cotton
2021 is entering its final stretch, but it is difficult to draw up a balance sheet as the contradictory signs are clashing against the background of the fifth wave of COVID 19. All countries seem likely to be affected once again. Even if the number of serious cases seems likely to be lower than in previous waves.
But far from slowing down the economy, we are witnessing an overheating phenomenon. Full employment is being recalled in many countries that had forgotten it existed. Household morale is recovering and the consumption of manufactured goods is continuing despite rising inflation, particularly in the United States.
However, it is difficult to describe the current situation in the developed countries: is it a lasting trend or a flash in the pan? One thing is certain, the money saved during the confinement is coming back into the economic circuit.
Our market is no exception to this rule. Textile mills are running at full capacity, yarn prices are rising allowing mills to continue to buy raw cotton while maintaining a significant level of profitability.
– The Chinese reserve continues to sell cotton every day and should quickly reach, if not exceed, 1.5 million tons sold to manufacturers. It remains to be seen when the reserve will replenish its stocks and with which cottons?
– The Indian, Pakistani and Bengali factories are also running at full capacity allowing local production to be massively used.
– Turkey is turning more and more to imported cottons, be they Greek or American.
The rebound is so powerful that inflation is now a concern, suggesting an inevitable rise in rates. While this will be beneficial for the repayment of public debts, it raises fears of higher commodity prices and the social tensions that may ensue.
In this context, we can understand the pressure exerted by the BRICs (Brazil, Russia, India and China) to limit excessively restrictive measures within the framework of COP 26. Vision, unfortunately extremely narrowed and focusing only in the very short term.
The US dollar as well as oil prices are rising steadily. As for fertilizers, prices are reaching record highs, urea having now exceeded 1,000 US Dollars per ton. Agricultural commodity prices will have to continue to rise for farmers to be able to afford to fertilize their crops.
In such an environment, freight cannot be reorganized as trade and volume are increasing.
Last week’s confoundingly neutral WASDE was completely ignored by all market participants.
It is hard to believe that this situation can last indefinitely and as many anticipate, the harder the fall will be. But in the meantime, let’s be a “Cicada and dance now”.
The current cotton season is certainly lively and will likely go down in the annals of history as a combination of varying factors have confused many market analysts.
The end of last week confirmed the uncertainty in the market as well as the volatility of commodities.
However, it all started with encouraging news.
In India, the CCI continues to sell off their large stocks in good quantities to both local spinning mills and traders. The size of the crop in India has come under much scrutiny with some believing that it will be reduced.
A figure of 33/34 million bales seems to be a more realistic figure than the 37 million that had been projected at the beginning of their season.
China’s new demand for Indian cotton is also an interesting element, as it could allow for a strengthening of the basis of this cotton, which remains among the cheapest on the market.
We should also not forget a surprisingly large sales figure announced by the USDA, though with some contract cancellations most notably from Bangladesh.
Then on Thursday ICE collapsed, seeing a limit down move in one session.
Such a decline on the market was perhaps more technical than anything else:
A decision by hedge funds to close out their positions and take their profits.
Or it might be seen as the market taking a breather from an overbought position. The market had closed up daily for nearly two weeks in a row, and such a breather was perhaps overdue.
However, the return of the spinning mills to the market on a more regular basis, should allow the market to stabilise, before resuming its forward march. If the new Indian crop statistics are confirmed, then the $1 / lb level will be just one step in the progression of prices.
New crop US could also under some pressure due to the vagaries of the weather. After an exceptionally harsh winter, particularly in Texas, the drought is beginning to worry many American producers.
Although planting cotton for the next season is financially profitable, it should be remembered that other agricultural products such as corn, soya and wheat are equally as profitable if not more so.
In the current market, the return of inflation is no longer an option but a reality. Under the impetus of speculative funds, it should also drive up the price of raw materials.
Despite the recent moves in the market leading to some suggestions that the market is now in correction, we believe that actually cotton should resume its continued march upwards.