Rose on Cotton: USDA Av. Yield 900 Lbs.; Be Wary of the Enthusiasm Factor

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Cotton bulls were small winners on the week, despite the release of a burdensome USDA domestic balance sheet with the Dec and Mar contracts picking up 37 and 33 points on the week, respectively.  The Dec – Mar inversion continues near flat, although the market settled at 39 points of carry on Tue.  Mar is now the de facto lead month by virtue of having open interest nearly double that of Dec.  

The fourth WASDE report release for the current marketing year is now behind us, with the latest report bearing surprises for most everyone.  Domestic production was estimated at almost 21.4M bales, which we expected, while aggregate world ending stocks were projected 1.5M bales lower Vs Oct at 90.88M bales – which we did not expect.  However, the largest part of the debit came due to periodic “backward revisions” and while it is not terribly difficult to see that such needs to occur, predicting the timing of these maneuvers by the bureaucracy is most challenging.

Cotton bulls will point to the 1.25M bale enhancement to the world consumption metric (now at 119.25M) and to the reduction in world ending stocks Vs Oct in an effort to support their analyses and positions (searching for data to support one’s case is most often ineffective at best and frequently disastrous).  However, we – and many others – have expected world consumption to be projected (at some point this season) near 119M – 120M bales.  Hence, one would think that at least a portion of the enhancement was baked into the market ahead of the report’s release.  But a world carryout of nearly 91M bales (around 2M bales higher Vs 2016/17) and carryout outside of China at 51M bales (nearly 11M bales higher Vs 2016/17) are difficult figures for which to make a bullish argument(s).

The bears will point to the 12.38M bale production estimate for the US and the 6.1M bales of expected ending stocks to support their case, in addition to the latter points immediately above.  The most ardent doubters of this production estimate are located somewhere offshore.  For us – and many others who have examined the US crop first-hand – it is much less difficult to believe.  Earlier this season we harbored concerns about the late planting and delayed maturity of the 2017 crop, but this crop has defied a great many experienced critics.

Still, we caution against an overly enthusiastic celebration of the seed companies and their blessing of our crop via genetics and the exploitation of genotype-by-environment interactions.  This segment of our industry has done a fine job and they are to be commended, but if one thinks that the Midsouth and the southeastern states can no longer realize an overall annual yield near 750lbs/acre on irrigated land and 500lbs, or less, on non-irrigated acreage, well…let’s not tempt fate.

More on Cotton

As for the expected 6.1M bales carryout prediction, we think that few actually expect this to be an ultimate reality – including the folks at the USDA who proffered the figure.  The USDA has projected large ending stocks over recent years at this point of the season (e.g. 2016/17) only to see them continuously whittled during the second half of the marketing year.  The current pace of export sales suggests that such is in the offing for 2018, even if current shipment data does not.

Internationally, Ruyi Group in China has reaffirmed its plans to commence spinning 900K – 1M bales of Delta cotton annually at Forrest City, AR by mid-2018.  Elsewhere, a bevy of minor and secondary producing nations across the world, including Azerbaijan, South Africa and Ivory Coast, continue to release statements that they plan to continue to increase cotton production through 2020, at least.

On the ground, harvest and field work experienced a few brief interruptions over portions of The Belt, but progress has been excellent for the most part after a later than normal start and is now on par with the 5-year average pace. We estimate the crop is currently 65% off the stalk with the majority remaining in West Texas and areas of the Southeast.  The Midsouth is now all but finished.  The USDA has increased the nationwide estimated average cotton yield to a record 900 lbs per acre, which is remarkable considering the curveballs Mother Nature has thrown at this year’s crop.  Six states saw estimated yield increases (AR, LA, NC, OK, TN, TX) with AR & OK seeing the largest expected increase over last month at 66 lbs. and 103 lbs. respectively.

Producers continue to see a strong spot basis for quality cotton, particularly long staple middlings with premium micronaire.  While we still see the potential for a spring rally, we believe the potential gains from that rally could easily be offset by a few months storage and interest, so we continue to advise selling recaps before additional storage accrues.

For next week, the standard weekly technical analysis for and money flow into the Mar contract remain less than supportive to bearish.  Scheduled index fund rolling culminates next week.  The record mill on-call position, combined with continued strong demand, will likely lend support on Mar futures, but burdensome supply is keeping our horns from growing, for now at least.

Have a great weekend!

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