To the casual market observer, it is hard to fathom why cotton futures last week posted their biggest daily gain in nearly three years. The move was spawned by USDA’s announcing robust export sales to diverse destinations, as well as a pick up in shipments as the West Coast catches up after containers piled up at ports due to the labor dispute early in the year.
The question is whether the market can remain positive. In Friday’s weekly report, the Commodity Futures Trading Commission showed index funds added 863 contracts to their long position, brining it to 50,449, while managed money substantially reduced their net long position—by 14,992, to 35,345.
One argument in favor of U.S. cotton in global markets is its superior quality. Although a number of Asian countries are big producers as well as consumers (especially India and China), only the Australia and Brazil have quality in the same league as that of the United States. And that quality has been improving, particularly for Upland.
“What once was the golden standard now is practically considered junk,” says O.A. Cleveland, Extension economist emeritus at Mississippi State University. “Some cotton coming out of Oklahoma last year measured 40 staple and was marketed through the Pima and Acala organizations.”
“Unquestionably, we have seen U.S. fiber quality improve over time, with significant advances during the last decade,” says Vikki Martin, director of quality research and product evaluation at Cotton Incorporated. “These improvements are mostly due to enhanced agricultural practices and technologies, as well as aggressive variety improvement programs.
“Certainly, 10 years ago a staple of 34 with color grades of 41 or better represented the average or base quality in the U.S.,” she observes. “Today, if we look at the amount of base quality we are producing, we find that in every cotton producing state, we have greatly reduced the amount of cottons shorter than a 34 staple. The entire U.S. Upland crop is averaging a staple of 35. But while the average fiber length for the Upland crop has been just over 35 staple for the past 9 years, we have not reached a stage where the average is consistently reaching 36 staple or higher.”
USDA data show a distinct shift to longer staples the past three years. As the lower staples have decreased as a percent of the crop and the longer lengths have increased. Of course, that’s a short time frame and could be due to weather or other factors but, as noted by these sources, it does appear to be part of an longer-term trend.
At the same time, improved harvesting/ginning technologies have contributed toward a higher average color grade, Martin adds. “From a global perspective, Cotlook A base quality is 1-3/32” (35 staple) and color grade 31. While room for improvement remains, the U.S. is certainly getting closer to this average across the cotton production belt.”
The delivery specs for ICE cotton futures reflect higher market demands: As of the December 2014 contract, 36 staple, rather than 35, became the benchmark on which premiums and discounts are applied.
The fact that many countries, including the world’s largest importer, China, use the ring method of spinning, as opposed to the United States’ use of air jet or rotor spinning technology, puts added demand on longer staples. U.S. mills are able to utilize shorter staples, while the ring method requires longer staple. With 70% of the U.S. cotton crop now exported, it is easy to see why it is imperative to continue to improve the grade grown.
That’s also why Rabobank and others believe U.S. futures prices may have more upside potential than downside, especially given the prospect of lower acreage in the United States this year.
Based on technical analysis, Pro Farmer analyst Rich Posson projects a possible July contract upside objective in the 69-74 cent range.