Shurley on Cotton: A View of the Boll Game at this Point

    Nearby, new crop March futures now stands at 77 and change. There is clear resistance around 81 cents. What does that mean in everyday language? It means 81 to 82 cents is a hurdle the market has to successfully negotiate if we are to realize something better at some point in our future—like 85 cents.

    The market is approaching the lows we last witnessed back in early October. Below this, there should be further support around 75 cents. What does that mean? It means, hopefully, there is only another 2 to 3 cents downside risk.

    So, we’ve got a likely near term ceiling at 81 to 82 and, hopefully, a floor of support at 75 to 77.

    USDA’s November numbers are summarized as follows:

    • The US crop was cut 1.35 million bales from the October estimate. This was due largely to an almost 1 million bale reduction (33%) in the Georgia crop due to Hurricane Michael.
    • US domestic mill use was cut 100,000 bales and exports reduced ½ million bales
    • World use was cut 880,000 bales (.7%) from the October forecast. China, Vietnam, and Bangladesh were unchanged but use revised down in Pakistan, Turkey, Indonesia, India, Brazil.
    • As a result, imports were also revised down for Vietnam, Turkey, and Indonesia.

    The market (March futures) has declined almost 3 cents since the USDA numbers on November 8th. The almost 1 ½ million bale reduction in the US crop, that might otherwise have increased price, was essentially nullified by cuts in US mill use and exports and weaker World use. As I have said all along, the health of cotton will be determined by demand. November is the second consecutive month that World use has been revised downward.

    US exports for the 2018 crop year are projected at 15 million bales. This compares to 15.85 million bales last season. Export sales thus far are approximately 10 million bales or 67% of the projection. At this time last season, sales were 61% of the total.

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    Top export destinations thus far are Vietnam, China, and Mexico. Vietnam is expected to import 7.6 million bales this marketing year compared to 6.9 million last year. China is expected to import 7.0 million bales compared to 5.73 last year.

    US exports are currently projected to be down 850,000 bales or almost 5½% from the 2017 crop year. Vietnam and China are consistently among our top export destinations. The fact that their imports are projected to be up while total US exports are projected to be down from last year, could signal a potential loss in US market share.

    Currently, the market is acting/reacting to uncertainties and unknowns. The US crop is still an unknown. Fiber quality will also come into play. The foreign crop is also an unknown. US export sales have been good but not great. Demand may be weakening a bit from what was just a few months ago a record forecast.

    Basis, once a strength to prices, has now reverted to its old self. The basis for 41-4/34 is now -200 March in the Southeast. 31-3/35 is essentially even to +5. Basis used to be in the +200 territory. Thus, the current basis represents a 4 cent swing in cash prices.

    One relief is that most/many growers likely priced a fair portion of expected 2018 production back when prices were much better. The question now is what to do with the rest.

    Marketing is equal parts trying to get a good price and also managing the risk in prices—because reality is that no one knows what prices will do.

    Downside risk seems limited. Prices could slip another few cents. If I’m a grower, the question is—do I want to take that risk in hopes that we get some recovery later?

    The first “target” moving up is 80 to 81 cents. That’s the first decision point. Is that a happy price? No. But in managing risk, that’s a price to shoot for on some portion of the remaining crop.

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