Cleveland on Cotton: Seemingly Bullish USDA Report Turns Sour

The cotton market had a rough and tumble week as a seemingly bullish supply demand report turned sour. Prices dipped on the week in spite of increased exports forecast by USDA as well as a lower carryover. However, it was healthy enough that the market was able to reverse its downward slide and settle the week on a positive note.

The old crop July contract is expected to become volatile with just 29 more trading days before first notice day. The likely range is from a low of 79 cents to a high in the low to mid 90’s. (I am not forecasting the mid 90’s, but I will not be surprised to see it.)

The December contract continues to keep both eyes focused on the Southwest drought across Kansas, Oklahoma, and Texas. While there have been more extreme drought events across the Southwest in past years, this 2018 drought ranks near the worst of them. Mother Nature will control prices on December contract for another month and will then move back and forth across the stage.

In the absence of moisture between and now and about June 10, another month, the new crop December contract will trade as high as 85-87 cents. Yet, the phrase “absence of rain” totally controls the trading range. Too, rain forecasts are not bright.

The USDA May supply and demand report released Thursday contained several surprises.

First, U.S. exports were increased 500,000 bales, from 15.0 to 15.5 million bales. USDA must have some secrets up its sleeve or either it does not believe its own data regarding export shipments. Yes, I give kudos to the Department for increasing imports a half a million bales as that was a highly significant change for USDA to make. Nevertheless, they are slow walking their export estimate higher rather than responding to the market forces affecting the price of U.S. cotton to foreign mills.

USDA seems to have taken the approach of increasing their export estimates bit by bit rather than estimating further than a month out. By increasing exports USDA lowered carryover to 4.7 million bales.

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Last week we commented that exports would reach 16.6 million bales and carryover would fall to 3.6 million bales. Those estimate still stand, irrespective of the USDA’s adjustments made in this month’s report.

Additionally, USDA continues to forecast world carryover above 88 million bales, some 2 million bales above trade estimates. Nevertheless, USDA are the standard, i.e., their official estimates continue to be the market’s gold standard. However, as the bell sounded to end trading on the week, cotton had regained some of its luster and should regain more in the coming three weeks. The latest supply demand report can be viewed here.

One may note that this WASDE report includes USDA’s first public disclosure of its cotton forecast for the 2018-19 marketing year. Notably, it suggests that the strong world demand for cotton will continue and that world consumption will again exceed world production. In fact, USDA currently forecasts 2018-19 world consumption will climb to an all-time historical level, 125.4 million bales.

U.S. export sales and shipments continue to support higher prices in both the July contract and the new crop December contract. Weekly nets sales of U.S. cotton totaled 196,400 bales of Upland and Pima. Shipments climbed above half a million bales as Upland shipments totaled 510,500 RB and Pima shipments were 10,300 RB.

The U.S. needs to average only 420,000 bales in weekly shipments during the remaining 12-1/2 weeks of the marketing year to reach the export goal of 16.6 million bales. Cotton cleared for export remains near an all-time high. Thus, the export pipeline remains chock-full of cotton and implies that exports will well exceed the USDA estimate of 15.5 million bales. The latest weekly export sales and shipments report can be viewed here.

Mill on-call sales keep the nails deeply embedded in the textile mill’s coffin. Mills have been, and continue to be, very reluctant to fix the price of cotton they have already purchased and in many cases already spun into yarn. The market has given them a multitude of chances, but that old big ugly “Grinch” in the form of greed has all but done them in this year.

Mills have simply waited far too long to fix prices and are now trying to blame others. Some are even calling for CFTC to disband the On-Call Cotton Report. If mills cannot currently follow the fundamentals of supply and demand there is scant reasoning that making the market less transparent would help them, or anyone for that matter.

The report has been as clear as air in advertising to all that mills across the world were not heeding the market’s price signals. Mills were simply wishing and hoping for lower prices while all others in the cotton world were screaming higher prices. The price signals have been crystal clear.

Last week we commented that new highs would be made, no change there. Nevertheless, growers should fix the price on at least 35 percent of expected production. Finally, given the extreme drought in the Southwest, and the current crop conditions, it is possible the U.S will plant 14.5 million acres or more in the U.S. this year, or 900,000 acres more than indicated in March intentions.

A continuation of the drought will bring in more insurance acres. Too, based on grower comments, growers in both the Southwest and MidSouth will plant their intentions plus as much as 3% more acreage. While the insurance program could call for more acreage, the productivity of such plantings, mostly in the Southwest, would be highly suspect.

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