July 17, 2008

The cotton market is experiencing its typically slow part of the season, and traders are closely watching the progress of the U.S. cotton crop and weekly export sales to give them direction. The market will be hypersensitive to weather, and although there are no seriously adverse conditions currently, something could pop up at any moment.

“The extremely light trade in recent cotton sessions likely will continue if fundamental conditions continue,” one trader said. “As long as the weather holds pretty well, the market probably will lazily lay around unless we hear some pretty big news.”

USDA reported this week that moderate to severe drought conditions persist in most of the key cotton growing areas of the United States. The department rated one-third of the Texas cotton crop as very poor to poor as of July 14. Most of the remaining acreage in the state was rated fair to good.

However, recent rains have improved much of the remaining crops in West Texas. Some industry observers say, due to dry conditions, high winds, blowing sand, and high temperatures in late May and early June, some of the estimated 4.7 million acres planted in Texas is likely to be abandoned. The remaining acreage very well might end up with above-average yields. Traders will be focusing on future supply/demand reports to confirm or dispute the hypothesis.

Meanwhile, analysts expected strong export sales as prices neared seven-month lows last week. However, USDA’s figures were only marginally higher. Net export sales of U.S. cotton totaled 56,800 bales in the week ended July 10, up six percent from the previous week and 45 percent from the four-week average. Featured buyers were China, Hong Kong, Taiwan, and Turkey. Net sales of 282,700 bales for delivery in 2008-09 were primarily for China.

Export shipments of 258,600 bales were down nine percent from the previous week and 16 percent from the four-week average. Major destinations included China, Turkey, Indonesia, and Mexico.

As the summer doldrums persist, spot cotton sales continue to be dismally slow as online trading by producers in Texas, Oklahoma, and Kansas totaled just 2 bales in the week ended July 17 compared to one bale the previous week.

Although cotton typically experiences slow trading at this point in the year, some analysts say cotton will feel pressure through the long-term from higher oil prices and the slowing world economy. They point to the fact that cotton is a discretionary item and is more susceptible to demand destruction than many other commodities.

“While consumers need food and energy in their daily lives and they buy precious metals as a store of value, cotton is not an essential item and, therefore, more susceptible to demand destruction than some commodities,” an observer explained.

In the case of cotton, the current energy debacle is affecting both the supply and demand sides of the equation. On the one hand, it becomes much more expensive to grow a crop, and many wonder how growers will be able to stay afloat if cotton prices remain at 70 cents per pound. On the other hand, textile mills face a similar problem since they use a great deal of energy to produce and transport yarn and fabrics. Without the ability to pass on these increases, there may be a loss of bales on both sides of the balance sheet, a trader explained.