2018/19 Fundamentals, Outlook, and Caveats

The futures market is one 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 expected price of cotton is relatively better than the alternative Texas row crops (wheat, sorghum, and corn).  Historically, this situation supports the planting of more cotton acres.  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 (5.2, circa February 2) we might expect a middle level of cotton plantings around 13 million acres.  This jibes with the intended plantings measured by the National Cotton Council during the mid-December to mid-January time frame.

Another wrinkle to consider, though, is that NOAA issued a La Niña advisory back in the fall.  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.  The current drought monitor shows widespread dryness, including moderate to severe drought conditions, across much of the Cotton Belt.

The new crop market appears supported by 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 support Dec’18 as well, but it may fade by summer. 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?

USDA Projections. In late November USDA published an early baseline of U.S. crop supply and demand projections, through 2027 (usually they do it in February).  The cotton projections for 2018/19 imply around, 12.5 million acres of all cotton, 13% abandonment, 13.8 million bales of U.S. exports, and 5.4 million bales of ending stocks.  That agrees with my previous notion of the 2018/19 year representing a small recovery from a big crop/increasing stocks situation for the 2017/18 marketing year.   The right-hand column of the table below paints a worst case scenario.  Assuming 13 million acres planted and 20% abandonment, the potential for new variety productivity and high carry-in creates a very heavy supply situation that would add to 2018/19 stocks, year-over-year.  The preliminary balance sheet projected by the National Cotton Council (c. February 10) has a similar conclusion.



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