2018/19 Fundamentals, Outlook, and Caveats

It is never too early to begin thinking and planning for next season.

The futures market is the best available indicator of supply and demand expectations for the 2018 crop.  2018 cotton futures have generally traded below those for the 2017 crop (see the graph above).  During the fall of 2017, Dec’18 has either been inverted below below the old crop contracts, or else it has at least not reflected a wide enough spread to economically justify storing cotton in 2018.  That suggests that traders expect excess supplies of cotton could be a little larger in the 2o18/19 marketing year.  This could easily result from having large crops and greater carryover in the U.S. and around the world following the 2017 crop.

Other factors come into play, such as the increase or decrease in U.S. cotton acreage in 2018.  The graph below shows the relationship of U.S. cotton acreage to a ratio of Dec’18 CBOT corn futures to Dec’18 ICE cotton futures in the first quarter of the year.   Based on the current level of that ratio (5.6, circa November 17) we might expect a middle level of cotton plantings around 12 million acres. That represents little change over what U.S. growers planted in 2017.  (To be fair, the above analysis needs to account for cotton acreage in the Mid-South and Southeast that might switch to soybeans if cotton prices slip over the winter.  However, increasing acreage in KS/OK/TX may offset decreases in the eastern cotton belt.)

Another reason to expect a similar level of cotton acreage is that major regions of the country (West Texas, Mid-South) are so far having a record-breaking kind of year.  That kind of vibe tends to be self-reinforcing.  Assuming demand influences are similar, this sounds like a recipe for starting off heavy and then treading water, i.e., maintaining high ending stocks and pressuring prices.  The onset of price weakness may come at a very bad time when the base prices for 2018 crop insurance policies are being established.  This is a rationale to consider hedging earlier than usual.

Another wrinkle to consider, though, is that NOAA has issued a La Niña advisory.  This is frequently associated with dryer than normal conditions which could last into next spring.  However, drier conditions early often lead to increased plantings in Texas, so the potential for an average size crop will still be there.  However, there may well be higher-than-average abandonment, so we will have to see.

If cotton futures prices slip over the winter due to growing excess supplies, there may not be enough whittling down during the 18/19 marketing year to bring about a significant recovery in prices.  But there are three demand oriented sources of potential price support. The first is if the historically high (and bullish) level of U.S. export total commitments (click here and scroll down)  continues well into 2018.  The second is if the large discrepancies between unfixed on-call sales and purchases creates a surging catalyst of futures buying on the old crop contracts before they mature.  Such an outcome could give a little lift to Dec’18 as well. The third possibility, impossible to predict, is if China begins importing significantly greater amounts during Calendar 2018.  For the last two years China has minimized their import needs by using their reserve cotton.  The remaining question about their inventory policy involves several unknowns:  1)  What sized inventory does China want to maintain as a reserve?  2)  How much of the current reserve inventory needs replacing?  3)  How much domestic new crop cotton can China use to rotate the reserve inventory?




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