The bears were winners this week, with today’s action providing much of the 289-point weekly loss as Dec settled at 85.23. The Dec – Mar spread weakened significant over the week to (48) points, but is still a long way northward Vs full carry,
While market watchers may have scratched their heads while searching for explanations behind trading action for the week ending Aug 3, an explanation for this week was evident – the USDA released unexpectedly bearish projections of domestic production and ending stocks.
In its Aug WASDE report, USDA modestly increased its projection of aggregate world production and notably increased its estimate of domestic production for 2018 to approximately 120.5M and 19.2M bales, respectively.
The projection of world ending stocks was projected significantly lower versus July at 77.1M bales while domestic ending stocks for 2018/19 were projected 15% higher versus July at 4.6M bales.
Projected carryout outside of China was off around 500K bales Vs July at just below 48.5M. World consumption was projected noticeably higher at a record of nearly 127.7M bales.
USDA – Counting Bolls – Potential For Errors?
Domestically, the USDA enhanced its projection of 2017/18 exports 500K bales versus July to 15.5M bales on projected abandonment and yield of 25% and 911 lbs/acre.
It should be noted that the USDA uses average fruit counts (recent history) for input into their predictive models where actual counts are insufficient. Given the advanced condition of this season’s crop, we thought that the employment of this maneuver was likely to be minimal – and this may have been the case for many states where yields are projected at record highs.
However, we think that any error is likely to prove to be in Texas and Oklahoma. It again looks as if the Sept WASDE report will be the first best estimate of seasonal US production.
There are many in the trade eyeing the USDA’s estimate of domestic production with scrutiny. They are also very wary of the USDA’s Indian production projection of 28.7M bales, which is higher than both public and private estimates currently emanating from the country. A Bloomberg article, published this morning, further highlighted the nation’s production challenges this season.
Still, the crop is in very fine shape, with 11 of the 17 cotton producing US states expected to see yields of more than 1,000 lbs/acre and 8 of 17 are currently expected to realize yields of more than 1,100 lbs/acre.
Total exports for the 2017/18 MY totaled nearly 15.83M 480lb bales, 370K shy of the USDA’s most recent estimate. Still, given sales carryover from 2017/18, the US is 58% committed against the 2018/19 MY, which commence on Aug 1.
Strong Demand Should Return Today’s Losses – But How?
Although it is early in the marketing year, we are projecting 2018/19 exports at 15.75M 480lb bales versus the USDA’s July projection of 15M.
Producers should see this report as a reality check, but while the August WASDE wasn’t friendly, it also didn’t contain the basis for a full-blown selloff, in our opinion. Assuming producers have followed the consensus advice to date and have priced 50% to 75% of their estimated yield, there should still be opportunities to recover from what may well turn out to be a temporary setback.
We look for continued strong demand to ultimately return todays losses, but whether those gains are in futures or spot basis remains to be seen. We’ll know more in a few days.
Internationally, political and economic unrest across Turkey have weakened the nation’s currency and could stifle US export sales of raw cotton to one of our largest customers.
For next week, the standard weekly technical analysis for and money flow into the Dec contract have turned bearish, but there is a lot of physical support under the current market. We continue to think that the ICE cotton futures have upward potential this season.
Have a great weekend!
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