wmeubank@ocp.kcmo.com
PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(October 13, 1997) COTTON: The October crop estimate is now under our belt, but it gave very little pleasure to either side. World crops grew another million bales, to satisfy the bears, while the market traded a shade higher, to please the bulls. American yields were left exactly unchanged for the third time in ten years, an odd statistical event. The better close was the first positive response to this report in six years. Easily the biggest number for the week was the new open interest record of 91,488 contracts, which was reached yesterday. Prices are now down for four consecutive weeks, and to observe that the market is weak is an unnecessary pun. October, before it expired, reached the lowest weekly close in three years.
There's no argument that prices are cheap. We find ourselves asking whether they are cheap enough, whether the bargain is irresistible. Certainly all users should be relieved to be able to plug in these prices for the rest of the season. If we can't recognize that, we must be blind. At the same time, there's always the instinct to try to get something cheaper, shave a few pennies, perhaps bring in next year's second-quarter cotton costs about 2% less. So far, it's been easy.
The market is being steered by these somewhat ample crops and by the reluctance of growers to accept current prices. We don't blame them, but there might not be much alternative. Any begrudging post-harvest rally will have to go some to offset carrying costs. Growers have a much more challenging period ahead of them than do their customers.
We've wondered whether the economic, problems caused by currency devaluations in the Far East can impact demand. To our surprise, cotton consumption for Indonesia, Malaysia, the Philippines and Thailand declined from 4.3 to 4.1 million bales over the last five seasons. No surprises there.
At the third annual Textile and Apparel Conference that was held in New York this week by Prudential Securities, the overall mood was definitely upbeat, much more so than in the previous two conferences. Almost all major publicly-owned companies made presentations, and with few exceptions, all boasted they were running at full capacity, if not actually turning down orders. Only the knit sector could still be described as less than robust, with even denim manufacturers threatening to reach that elusive full capacity mark just around the corner.
With that In mind, and with the stirring export success that we are having, it is not wrong to wander when the demand side will begin to take hold of prices. Certainly the longer-term prospects are happier than we have been accustomed to. One dominant trend is the movement of manufacturing to Mexico and the balance of Latin American and the Caribbean. Mexico has now replaced China as the leading exporter of cloth into this country. Only five years ago, China was shipping in over four times the Mexican production, so we have witnessed a huge shift, all very much in favor of U.S. cotton growers.
New-crop prices have quietly climbed 2½¢ from their lows and are now only 1¢ off their highs.
Herman S. Kohlmeyer, Jr. for Ernest Simon
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