Crop Progress and Condition. This season’s U.S. cotton planted acreage was above average in siz. For the week ending August 13, fruiting rates and boll opening were right on par with the five year average pace. The U.S. cotton condition ratings still show a strong majority (61%) of U.S. cotton rated as “Good” to “Excellent” with another 29% rated “Fair”. The pattern of crop condition in Texas is similar to the U.S., although as the chart shows, the weekly variations in condition do not correlate very well with the yield outcome. Whether the 2017 yields remain as strong as originally forecasted in the August WASDE is the million dollar question.
Weather. One important benchmark is soil moisture, which had been widespread adequate coming in to the planting period. There was a drying pattern in Texas during May, then widespread showers in early June, and again over June 24-25, and again over the July 4th holiday weekend. These events had a patchy influence on the establishment of the West Texas (and Kansas and Oklahoma) crop. Since then there have been beneficial rains through July and August. In the last week, parts of West Texas received as much as six inches, which is shifting the focus from moisture to heat units. The most recent regional assessments (click and scroll down) indicate these rains have had a beneficial effect.
Production. The evolution of opinions about U.S. production has followed the usual benchmarcks from USDA. The May and June WASDE new crop projections assumed USDA’s March 31 estimate of 12.2 million acres of all cotton. USDA further assumed ten year average abandonment, weighted by region and adjusted downward in the southwest to only 10% to account for favorable moisture. That resulted in 19.2 million bales of production which exceeds my earlier conservative estimate of only 18.0 million bales. On the other hand, plugging in the lower June 30 estimate of acreage, plus a higher likely abandonment, brought the production forecast back to 18.3 million bales, which had me leaning towards a smaller projection prior to both the July and August WASDE reports. The New York roundtable discussion reflected a little over a million bales difference of opinion on the question of Texas production. Prior to the August WASDE, the average opinion of U.S. analysts was 18.8 million bales of U.S. production. It was therefore a surprise when USDA projected 20.6 million bales in the August WASDE. History shows an average deviation of 6.3% between USDA’s August projection of U.S. cotton production and their final estimate (next July). That suggests that this 20.6 million bale projection could swing 1.3 million bales higher or lower before it’s all done.
Exports. A significant aspect of the May and June WASDE was that USDA did not maintain the level of U.S. exports at 2016 crop levels, reflecting USDA’s expectation of greater foreign supplies. I think that is reasonable, and I further do not expect record levels of export demand for the 2017 crop unless it has the widespread exceptional quality that the 2016 crop had. The August WASDE raised projected U.S. exports by 700,000 bales to account for larger exportable surpluses with larger production, plus an historically strong pace of sales going into the new marketing year.
Ending Stocks. In historical terms, it seems very likely that 2017/18 cotton ending stocks-to-use will be a couple of percentage points higher than the level for the 2016/17 marketing year. History shows that an increase in ending stocks and stocks-to-use is typically associated with price weakness.
Growers should consider that the Dec’17 contract has a good chance to trade into the lower 60s by mid-Fall, and perhaps even into the 50’s after that. That could certainly happen if we have 19+ million bale crop, or have below-average quality, or both. The weaker price scenario is also tied to the strong possibility of increasing foreign new crop supplies. This possibility strongly suggests that growers should consider forward contracting while they still can, or (second best) hedging downside risk with put option strategies.
The new crop world market will have to deal with increased production and continued slow growth. Fortunately, world consumption is still expected to slightly exceed world production, but this will slow efforts to reduced world ending stocks. It may also lead to price pressure next fall when both new crop supplies and stocks-to-use outside China are increasing. For example, the world’s top cotton producer, India, is will likely have increased cotton acreage and production (assuming an average monsoon season). In fact, the issue lately in India is whether excess rain and extreme flooding in cotton areas like Gujarat will result in a net increase or a net reduction of cotton production. Also, the most important cotton growing states in India are reportedly also experiencing a serious pink bollworm outbreak.