Rose on Cotton: How Dry Does Texas Have To Be To Move USDA Projection?

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The Dec contract took it on the chin this week (mostly on Friday), giving up 275 pts to finish at 89.85.  The Dec – Mar spread finished near flat, inverted at 9 points.  

It was a rather large news week for agricultural markets, and especially for cotton.  A neutral supply and demand report from the USDA was followed by a release of generally supportive US export data. The Fed raised interest rates, which was expected, but now is looking at 4 rate hikes this year versus the originally planned three. There were numerous points to ponder on international trade as well as weather issues for traders to consider.

WASDE Report

In its June WASDE report, the USDA reduced its projection of aggregate world and domestic ending stocks for 2018/19 to approximately 83M and 4.7M bales, respectively.  Projected carryout outside of China was near unchanged versus May at 49.9M bales.  World production was projected lower (as expected) on international weather issues while consumption was projected slightly lower, most likely on supply concerns and demand rationing.

Domestically, the USDA enhanced its projection of 2017/18 exports by 500K bales versus May to 16M bales.  This was expected and will likely prove to be a significantly insufficient forecast.  US new crop production was again projected at 19.5M bales, and we must say that we are dismayed. This projection has remained unchanged since the initial projection in February at the Agricultural Outlook Forum.

The refusal to reduce the projection occurred despite the persistence of a severe drought across West Texas.


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Overall, we think the report was mostly neutral, but it is becoming increasingly obvious that the market is not trading the USDA’s prognostications; Dec trading in the mid-90s is not reflective of the USDA’s projected carryout levels, no matter how anyone endeavors to slice/dice them.

USDA Crop Projections

We have tried to understand the USDA’s hesitation in moving this year’s US crop projection lower.  The key word here is projection – it is a moving target, it is okay to miss.  The way the USDA produces its figures follows:

  • The USDA – World Agricultural Outlook Board (WAOB) is responsible for the release of all figures for the entire year and for the development of international estimates and projections at all times
  • WAOB is also responsible for domestic figures, outside of production, at all times
  • USDA-NASS provides all domestic acreage estimates and production estimates to the WOAB from July – Dec

Given these parameters, it certainly seems that the WOAB has decided to default on its portion of the bargain.  It is true that the WOAB lost a long-time leader in cotton to retirement relatively recently, under whom we did not witness this “kicking the can down the road” maneuver.  In the end, we would remind USDA that it is their responsibility – to the best of their ability – to make crop projections with the best information available at any given time.

It does not seem as though they have done this.  It is fair to assume that Jimmy the Greek would have had a better record in predicting the outcome of games if he had done so in the third quarter, 6th inning, second period, etc of said contests rather than before the games actually commenced.  The current USDA stance, we think, damages their credibility.

Export Sales

US export sales proved surprisingly strong at current elevated price levels.  Total net sales against 2017/18 were higher Vs the previous sales period by approximately 43K while shipments were off, but still extremely strong, at around 505K running bales.  Total sales against 2018/19 were significantly higher at nearly 260K running bales; sales against 2018/19 currently stand at a running total of more than 5M 480lb bales.

The recent slowing of new crop sales may be as much attributable to merchant’s unwillingness to over commit to mills as it has been higher prices.

Texas Rain

On a bearish (but positive for West Texas producers) note, significant rains are expected over the near-term across the West Texas region, and specifically across areas that have remained especially parched from the lingering drought.

China

Finally, China approved on Thursday an additional equivalent of around 3.7M bales of cotton import quota, bringing the total to around 8M bales.  The additional sliding scale quota is reportedly earmarked for privately owned mills.  Given these announcements, it seems that the affect of the imposition of $50B in tariffs on imports from China are unlikely to markedly affect sales of US cotton into China over the near-term.  Too, the cessation of joint military maneuvers between the US and Sorth Korea could ultimately prove to be a positive factor in trade negotiations. 

Cotton Commentary


Forward contracting activity slowed this week, which also correlates with the aforementioned slowing of new crop sales. Producers have been steady sellers on each leg up since we breached the 80-cent level, and many producers have committed 60-70% of estimated yield. This is a particular problem for growers in the High Plains, as their weather to date makes even average yields look optimistic.

Given continued demand for US cotton, and the fact that tariffs have yet to be a major factor in rationing US cotton consumption, it is not unreasonable to see this week’s action in the Dec contract as ordinary contraction in a sideways trading market. Producers who have sold 50-75% of their estimated yield should avoid panic selling into further drops into the high 80s.

With that said, we’d hate to let a week go out without reminding producers that the option pit is a wonderful place to buy security, cure indigestion and sleep better at night.  If this week’s market action has you looking for whisky, Rolaids and cigarettes, consider calling your broker.  

For next week, the standard weekly technical analysis for and money flow into the Dec contract remain bullish, with the market remaining in something of an overbought condition.  However, it could well be domestic that decides next week’s market action.

Have a great weekend!

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