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Thompson on Cotton: What Caused Last Week’s Weakness?

Ernst Undesser
By Jeff Thompson, Autauga Quality Cotton Association May 15, 2017

Thompson on Cotton: What Caused Last Week’s Weakness?

The cotton market, which has seemed to be on autopilot for some time now, quickly began to lose altitude last week.  The December contract opened Monday at 74.12 to quickly lose 100 points in the first two days of trading.  These losses were largely due in anticipation of what many thought would be a rather bearish USDA WASDE report.

 

 

Selling was fueled by the fear it would reflect higher ending stocks due to increased production and decreased consumption. As expected, the report did indicate such causing the market to drop another 71 points to settle Wednesday at 72.33, the lowest close in over a month.

I will not bore you with all the detailed numbers, but rather touch briefly on those responsible for the selloff – the very ones to consider as this crop progresses. Bear in mind their inaccuracy is quite possible this early in the season.  It would only take minor improvements to put estimated U.S. ending stocks in a much more bullish light.

USDA predicts this coming year’s U.S. crop to be 19.2 million bales, making it our largest crop in 11 years.  In turn, they lowered U.S. exports to 14 million bales, which if both are correct, would raise our ending stocks after the 2017 crop to five million bales.

This larger production number is based on a 21 percent acreage increase over last year and current weather conditions that favor potential yield.  At the sake of sounding like an eternal optimist, one must remember the 2017 crop is far from being in the warehouse. Much can and will happen between now and harvest to affect the final yield outcome.

Below is an illustration of the wide variance in total production that can be had when accounting for slight differences in abandonment and per acre yields. Seven million bales can be a market changing number.

Abandonment

                                       5%                       10%                   20%                   30%        

750 lb. yield           18.1 Million          17.1 Million       15.2 Million        13.3 Million

800 lb. yield           19.3 Million          18.3 Million       16.2 Million        14.3 Million

850 lb. yield           20.5 Million          19.4 Million       17.3 Million        15.1 Million

Another item to watch is U.S. exports. In this report, foreign sales of the 2016 crop were raised to 14.5 million bales. Not a surprise given the large sales figures we’ve seen week after week. Certain to be the highest export sales ever, the question becomes can we duplicate it or improve on it in 2017.

This is where the rub comes. The USDA doesn’t think we can, lowering next year’s exports to 14 million bales based on the premise competing countries will have larger supplies of cotton, as well. U.S. cotton’s share of the world trade will have the utmost influence on the direction this market takes over the next several months.

Cotton Commentary


Today’s (05-11) positive market action was solid proof of this following another excellent weekly export sales report. Upland sales of old crop (2016) cotton was up 5 percent from last week at 160,000 bales.  Better yet, 146,400 bales of new crop (2017) cotton were sold.

As a result, the market traded up over a 100 points at one time on Thursday to settle at 72.53.  John Mitchell, CEO of Choice Cotton, makes a good case for increased exports in 2017 when he points out that as of today we have already sold 2.5 million bales of new crop cotton for export. This is two million bales higher than what we’ve seen at this time with the previous two crops.

Not to totally dismiss world numbers in the report, USDA estimates world ending stocks would decline by 2.4 million bales.  This is the third consecutive year where global consumption will exceed production.

We’ve said for months now that the December contract will, at some point, begin to take a life of its own.  The May USDA report was the first sign of this as numbers were plugged into planted acres.  Be assured that the market will take its cue on how these figures come to bear, so watch closely for pricing opportunities.

Ernst Undesser
By Jeff Thompson, Autauga Quality Cotton Association May 15, 2017