It means that someone believes the best market for cotton is the futures market delivery mechanism. If delivery against futures is the best market for stocks, then it means the cash market does not want/need cotton. Of significant importance is that stocks are being moved to a privately-owned warehouse as opposed to a merchant/cooperative warehouse.
The delivery of certificated stocks against futures contracts is implied by their transfer to a private warehouse. It indicates how fragile the market is.
The world cotton production has decreased by a million bales in the last two world supply and demand surveys, but prices have remained unchanged. Yes, some traders saw this as a positive sign, studied the price charts, and loaded up their buy orders, only to watch prices drop back to the same old level we have seen since November 2022.
The USDA revised its estimate of the U.S. crop downward by 900,000 bales in its September global supply and demand report, bringing it to 13.1 million bales. The market estimates that it may just be 12.6–12.8 million, but the 88–90 cent price nut is still too difficult to crack.
Saying again without demand, a bullish market cannot exist. There is no buying to push prices higher.
The market is trading in a cavity of price equilibrium, typically between a close 84-88 cent range and a little wider 82-90 cent range. While growers continue to gamble on a 90-cent price tick, mills continue to believe they can buy cotton below a New York quote of 82 cents. However, the grower has a better probability of receiving 90 cents than the textile mill does of receiving 83 cents in either exchange.
The second- and fourth-largest producers in the world predict harvesting less produce than expected. India crop could be one million bales smaller than expected, and the U.S. crop is three million bales less than expected. Formerly the world largest producer, the U.S. has dropped to fourth place this year, surpassing Brazil for the first time.
However, despite the fact that the U.S. cotton sector has experienced two significant droughts, world cotton stockpiles as of year end increased to 90 million bales, or around 78% of current demand. Consuming nations hold more global ending stockpiles than generating nations do. The decrease in global cotton commerce is evidence of dwindling demand.
The decline in cotton demand is closely related to the decline in the U.S. and European economies, as well as the fact that Chinese consumers are currently experiencing many of the same economic problems as other consumers, such as inflation, skyrocketing energy costs, rising interest rates, and rising food prices. Till at least the second quarter of 2024, any gain in cotton demand is on hold and is not anticipated to improve. This means that the 90 cent range will remain the trading range for cotton prices.
USDA forecast the 2023 world production at 112.4 million bales, down from 118.7 in 2022. World consumption was forecast at 115.9, unchanged from 2021. World trade was decreased to 43.3 million bales again, an indication of weak demand compared to forecasts. World stocks will shrink this season, but only because production was dramatically reduced, not because of demand growth. Demand was estimated to have recovered from its pandemic level of 111 million bales, but only returning only to its 2021 level.
U.S production was forecast at 13.1 million bales, consumption was left unchanged at 2.1 million, and U.S. carryover was estimated to fall 100,000 bales, down to 3.0 million bales. With U.S. export share declining, the historical bullish relevance of U.S. carryover falling to 3.0 million bales does not carry the fundamental importance it once commanded. More importantly, the U.S. is also seeing a significant deterioration in its share of the export market, losing steadily to Brazil. The market share not lost to polyester is now being lost to Brazil.
