Where did the year go?
Here we are writing the last report for the year when ginning of the 2017 crop only finished a few weeks ago and we have the 2018 crop in the ground.
It’s been an interesting period for the cotton market as the very bearish tone from earlier in the year has been replaced by a slightly more optimistic feel as we come to the last few weeks of 2017.
That more positive aspect is being attributed to improved cotton demand from a range of consuming countries and consequently we are finishing 2017 with some attractive cash prices for the 2018 crop, well above the $500 per bale level.
Quickly reviewing the year, I think we get the impression that really things have not moved that much and looking at the numbers supports that perspective.
ICE Futures posted their highs early in the year with May 18 reaching 75.44 on 20 March and Dec 18 hitting 73.10 on the same date.
Lows came during the middle of the year when the bearish outlook was obviously at its peak, May 18 touching 66.55 on 14 July while the December dropped to 65.80 on 26 June. Those lows certainly look as though they won’t be touched again this year but perhaps the highs have a chance of being exceeded before New Year’s Eve comes around.
Basis levels have remained very firm throughout the year and consequently values at $500 per bale or above have been available for 2017, 2018, 2019 and even 2020 crops.
The Australian dollar has had a nine cent range during 2017 having commenced the year on its low at .7184 (2 Jan 2017), reached its high at .8060 on 8 September and currently sits right in the middle of that range around the .7600 level.
All in all, we have had some movement but nothing out of the ordinary for the cotton market.
As we head into 2018 the market is focused on two major factors.
Firstly, and the most pressing, is what is happening with the large US crop? In the middle of the year expectations had been for a crop around 19 million bales and this was considered a major bearish factor so you can imagine the surprise when in August the USDA increased the crop size to 20.5 million bales.
The market perversely moved higher and here we are at the end of the year feeling comfortable the market can handle such a large crop.
Well for a start the USA has been on a fantastic run of export sales but that has only come about by demand levels for cotton being much better than the market had anticipated.
The demand issue brings us, as always, to China, and what that country will do with their import policy. Having done an excellent job in reducing their burdensome stocks it is only a question of time as to when the authorities will allow more imports.
Although taking a reduced percentage, China remains our number one market and likely to remain in that position for many years to come. Having visited China numerous times this year the striking feature is the focus on the environment.
That attention is very evident, and pretty much in every meeting we had at some point the discussion reverted to the environment. This environmental focus is having a real impact as it is increasing costs to industry because businesses must become compliant otherwise they run the very real risk of being closed down by the authorities.
Such action looks as though it is going to be a positive for cotton as the manmade fibre price increases due to those increased costs. Cotton consumption has increased in China and the hope is that this is maintained.
If we add crop concerns for Pakistan and India, both of whom were supposed to produce excessive crops this year, then it is not difficult to see why the tone of the market has changed.
At the time of writing, the ICE Futures market is over 70 cents and the bulls seem to have control.
This is a remarkable situation in light of the fact that the USA has produced around 21 million bales, its largest crop in a decade, and yet it seems that most will get sold.
As we look forward to the Australian 2018 crop we have again that optimistic feel to production and hopefully conditions will be a bit more conducive than they were last season.
As things stand we could have production around 4.5 million bales and despite the still relatively high stock position in the global market our product should move.
Of course, the same old question will still hang over our market – what are the Chinese going to do?
Well they have already announced that sales of their reserve stock will again proceed in the March to August period, thus continuing the tightening of the government stock.
Will this then require more imports? The market sentiment is that China will definitely have to import more during 2019 but there is a lurking suspicion that something could happen in the second half of 2018. Let’s hope so as that really could provide some fireworks in our market.
Wishing everyone a great Christmas, happy new year and safe travels during the holiday season.