Cleveland on Cotton: Second Chances; Demand Remains Strong

©Debra L Ferguson Stock Images

The prior week we discussed the second chances the market typically provides growers. This year was no different as this week’s trading action provided those that missed out on the 90s a shot at the mid 80s. Take advantage of it this time. Granted, Mother Nature make take even more off the Texas, Oklahoma and Kansas crop.  

A box plum full of corrections and adjustments was USDA’s gift to the cotton market this week. The market had flirted with breaking below it 82-83 cent price support, adjusted itself, and the stage was set for the July supply demand report. USDA delivered the bulls all they could digest and more, shoring up the market on both the supply side of the price equation and the demand side as well.

In one of its most bullish reports in years USDA:

  1. lowered new crop production for both the U.S. and the world,
  2. increased old crop and new crop consumption,
  3. increased old crop exports, and
  4. lowered old crop, new crop and world carryover.

The bulls themselves could not have scripted a better report for their tastes.

As a backdrop to the fundamental adjustments USDA corrected one of its major database shortcomings. The agency corrected their China database, reflecting a significantly lower stock level in China, taking some 3.5 million bales out of the Chinese production box.

Now, only the inflated stock level for India keeps a cloud over the USDA estimates. The market responded to the report with a 4-cent limit up move in little over an hour. The 10-13 cent very wide trading range remains in play as the market climbed back above the 50 day moving average.  Reaching the near life of contract 95 cent high settlement price will be difficult to scale and likely the market will spend most of its time in the mid 80s unless Mother Nature zeros out more acreage, or some other malady reduces crop size.

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In raising it 2017-18 U.S. export estimate to 16.2 million bales USDA joined the mainstream of analysts that have been expecting exports to be above 16 million bales since March. This dropped U.S. carryover to 4.0 million, and only some 200,000 bales above industry expectations. It has been the demand for U.S. cotton that has led the charge to higher prices. Nothing has changed in that regard. With just 3 reporting weeks left in the marketing year it is still possible that U.S. exports will be as high as 16.4 million bales.

Production and Carryover

Additionally, USDA also lowered 2018-19 production 1.0 million bales, down to 18.5 million due to abandonment and the continued drought in the Southwest. The current estimate projects that every bale of U.S. cotton produced in 2019 will be sold in either the domestic market or to foreign mills. That will come on the heels of the 2017-18 marketing year that saw all but about 1.7 million bales of the 21 million bale crop consumed. Thus, demand remains very strong as cotton comes back in favor with the consumer.

World 2018-19 production was estimated at 120 million bales and consumption at 124 million bales. World carryover was pegged lower down to 78 million bales, reflecting an 8 million bale reduction during the year. The world is expected to see a 4 million bale increase in consumption and another 4 million bale drop in production. Chinese stocks are expected to fall to just 33 million bales at the end of the 2018-19 marketing year, compared to 46 million bales two years prior, the end of the 2016-17 marketing season. 

It was evident from the weekly export report that, as predicted, the Chinese-U.S. tariff situation was not affecting the supply demand situation for cotton. Regardless of “who does what” cotton supplies are very tight and mills will continue to buy U.S. cotton.

Prices should be expected to battle the mid to upper 80s as the production advances. The December 2019 is again approaching 82 cents. Cotton supplies will continue to be very limited, but one should expect increased plantings in 2019 to weigh on prices. The current tightness of supplies will, nevertheless, carry into the 2019-20 marketing season. Yet, prices at the current 81-82 cent level in December 2019 beg for some pricing by growers.


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