Cotton prices may face a 'lot of downside risk'

13.06.2017

Cotton producers should consider forward sales of the fibre "while they still can" at elevated values, a leading academic said, as investors mulled the impact to price prospects from raised US stocks prospects.

The forecast US cotton balance sheet for 2017-18 suggests "a lot of downside price risk" for this year's crop, said Dr John Robinson, cotton marketing expert at Texas A&M University, flagging the potential for the new crop December lot to weaken from its current price of 72.42 cents a pound in New York.

It is "possible… that Ice cotton futures could slip into the mid-to-lower 50s cents per pound by harvest time," he said, suggesting the potential for a multi-year low in values.

While futures touched 55.66 cents a pound last year, on a spot contract basis, they have not been below that level since 2009.

'Sell while you can'

Mr Robinson added that a such a price fall "could certainly happen if we have 19m+ bale crop, or have below-average quality, or both".

He urged farmers to "consider forward contracting while they still can" at higher values, or as a second-best alternative, to use put options to hedge against price falls.

The comments chimed with the broadly downbeat reaction to the US Department of Agriculture's latest forecasts for cotton supply and demand, which restated an estimate of a 19.2m-bale domestic harvest this year, and cut by 500,000 bales to 13.5m bales the forecast for 2017-18 exports.

The cut to US export hopes, on ideas of "less global import demand given strong and improving crop forecasts in many import partners," fed through into an idea of US cotton imports hitting a nine-year high of 5.5m bales at the close of 2017-18, which starts in August.

"It seems very likely that 2017-18 cotton ending stocks-to-use will be at least 10 percentage points higher than the level for the 2016/17 marketing year," Mr Robinson said.

"History shows that an increase in ending stocks and stocks-to-use is typically associated with price weakness."

Supply vs demand

Separately, Rabobank termed Friday's USDA data as "bearish", given the higher stocks estimate implied by weakened US export prospects for next season.

"Higher global production… mainly in consumer countries like Pakistan and Mexico, is lower their import demand," the bank said.

The USDA in Friday's Wasde report on world crop supply and demand raised by 1.5m bales to 114.7m bales its forecast for global cotton output next season, including a 500,000-bale upgrade to expectations for Chinese production.

However, Louis Rose, at Rose Commodity Group, took a more neutral view on the Wasde, saying that while the Wasde estimate were "bearish on the supply side", they were "supportive on the demand side" at the global level.

The Wasde also upgraded by 760,000 bales, to 116.5m bales, the forecast for global cotton consumption next season.

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