Cotton futures had two reasons for gains in early deals – but spurned them both.
The first cause was a recovering in prices of oil, the source of rival fibres such as polyester, with Brent crude rebounding 5.8% to $26.32 a barrel as of 10:15 UK time (05:15 Chicago time).
That helped, for instance, futures in biofuel-related ags recover. Soyoil, a key biodiesel feedstock, recovered 1.4% to 25.39 cents a pound in Chicago (although remaining near 13-year lows reached earlier this week).
Corn, a major raw material for ethanol plants, gained 1.2% to $3.42 ¼ a bushel for May, rebounding from 20-month lows.
‘Another strong round’
The second potential carrot to cotton bulls was the calendar.
It being a Thursday, the US Department of Agriculture will later release US export sales data for last week which have been on a bit of a roll, reaching 484,229 running bales for upland cotton in data for the week to March 5.
That was the best performance since November 2017. And further week of strong statistics are expected later, as buyers cash in on weakened prices.
“We, and many others, expect another strong round of US export data to be released,” said Louis Rose at Rose Commodity Group.
“Still, there is certainly no guarantee that such would keep the speculators from continuing to sell the market short,” Mr Rose added.
And, indeed, such looked the case in early deals as the New York May contract dropped 1.7% to 55.67 cents a pound, and earlier touched 55.20 cents a pound – the lowest for a spot contract since August 2009.
Technical factors were not a help, with the fall below the March 2016 bottom of 55.66 cents a pound damaging cotton’s chart appeal.
However, there are worries too that even if the USDA does announce later another round of strong US cotton export sales data, the performance will not prove sustainable in the face of coronavirus damage to world economic growth prospects.
Of particular concern is that the virus could spread in Vietnam, the world’s third-largest cotton importer, where data on Covid-19 infections appear somewhat erratic.
Some week after announcing the recovery of all 16 initial cases, the country earlier this month revealed the discovery of a further 52, blamed on Vietnamese returning to the country from London and Malaysia.
As Goldman Sachs said earlier this week, “with the virus spreading beyond China, supply-side disruption to the textile industry in Vietnam presents a tail risk to US exports for the second and third quarters of 2020, as the country was the lone bright spot in US exports”.
Certainly, of the 7.47m running bales of upland cotton that the US has exported in 2019-20, Vietnam has been the top destination, at 1.78m running bales, with a further 1.44m running bales booked for the country later in the season, as of last week’s USDA export report.
Row crop play-off
Some investors are now looking to the supply side for relief from the cotton price slump, with weaker prices likely to cut the amount of fibre planted by growers in the likes of the US, where the spring sowing window is opening up.
As the National Cotton Council said last month, forecasting US sowings of 13.0m acres this year, “history has shown that US farmers respond to relative prices when making planting decisions”.
With cotton prices lower - even then - relative to both corn and soybean values than a year before, both crops were “expected to provide modestly more competition for cotton acres”.
With cotton’s continued underperformance, Tobin Gorey at Commonwealth Bank said that “market discussion is beginning to think in terms of how much less cotton will be planted because of the price fall”.
That said, although “that is potentially supportive of prices, we are not sure it yet carries enough weight to bump a running bear off course”.
‘Big US acreage ideas’
In fact, a survey from Allendale released overnight showed farmers intending to plant, at 94.631m acres, even more corn than indicated by a USDA forecast of 94.0m acres released a month ago.
However, as CHS Hedging said, while “big US acreage ideas” had, alongside “slowing demand for ethanol from sharp losses in the crude market”, played a role in the weakening in corn prices this week, Thursday’s oil price revival was enough to help corn futures recover a bit.
US corn export sales later are expected at 600,000-1.20m tonnes, potentially a decent total (albeit down from the 1.47m tonnes the week before) with recent price falls having enhanced competitiveness, at a time too of a decline in estimates for South American harvests.
“US corn export prices are competitive to Argentina,” said ADM Investor Services, noting too that “there remains some uncertainty over Argentina export situation after they closed their borders due to spread of the virus”.
Wheat prices too found a tailwind, helped by talk of importers on the prowl, with Benson Quinn Commodities noting that “wheat and soybeans are finding some underlying demand”.
Chicago soft red winter wheat for May added 2.0% to $5.18 ¼ a bushel, crossing back above its 10-day moving average.
However, it was Kansas City hard red winter wheat which did better, gaining 2.6% to $4.58 ¼ a bushel, amid talk that it had gained the eye of Chinese importers, who had previously been linked with spring wheat.
Benson Quinn Commodities noted “rumours China is inquiring about US wheat values and hard red winter wheat in particular”.
ADM Investor services flagged “talk that China may be interested in a few cargos of US hard red winter wheat”.
Domestic food demand may be having a role to play too, with “talk that US consumers have increased buying of bread as restaurants are closing and more are cooking at home”.
Certainly, Kansas City wheat’s atypical discount to Chicago has now narrowed, May basis, to a six-month low of some $0.60 a bushel – crossing in the last session back below its 200-day moving average for the first time in a year.
Indeed, there are ideas of the unwinding of short Kansas City-long Chicago spreads fuelling the hard wheat contract’s outperformance.
US export sales data for wheat are expected later at 200,000-600,000 tonnes, compared with 452,257 tonnes last time.
‘US prices are competitive’
As for soybeans, US export sales data later are expected at 400,000-1.0m tonnes, up from a meagre 302,835 tonnes last time.
In fact, there is some more upbeat talk on Chinese demand for US soybeans too, with ADM Investors Services noting “talk of China interest in US soybeans”, amid “concern about South America shipping outlook.
“US soybean prices are competitive to China versus Brazil.”
Karl Setzer at AgriVisor also reported that “China is rumoured to be shopping for US product.
“While Brazil is the cheapest source of soybeans for immediate shipment, the US and Brazil are nearly equal for May shipment which is where China is likely going to be buying.”
DDGs vs soymeal
Still, on actual sales, Brazil still seems to be winning out.
Terry Reilly at Futures International noted that “six cargos of Brazilian soybeans were booked by China on Tuesday, mostly for July”.
And with higher oil prices lowering the pressure on ethanol plants to shutter - giving hope for supplies of DDGs, and diminishing the potential for rival soymeal to pick up extra demand – Chicago soybean futures managed less marked gains, adding 1.0% to $8.33 ¾ a bushel.
Soymeal itself stood up 0.6% at $305.80 a short ton, far underperforming soyoil for once.