2018/19 Fundamentals, Outlook, and Caveats

Fundamental Outlook. The new crop cotton supply and demand picture was bullishly adjusted by USDA’s July 2018/19 WASDE numbers.  This report showed a major tightening of foreign supplies and ending stocks, month-over-month.  The dominant source of change was a 3.3 million bale decrease in Chinese carry-in.  This resulted from raising Chinese consumption in the the previous four years, and reducing Chinese carryover stocks accordingly.  Major month-over-month changes in foreign new crop production included Brazil (+500,000 bales), India (+200,000 bales), Mexico (+150,000 bales), and Australia (-100,000 bales).   Foreign consumption was raised by 1.6 million bales month-over-month owing to increases in China (+1.0M bales), Bangladesh (+200,000 bales), Pakistan (+200,000 bales), Brazil (+150,000 bales) and Mexico (+50,000 bales). World Imports and Exports were both raised by 170,000 bales month-over-month, with the large U.S. cut in exports being offset by an increase in Brazil.  The bottom line of all this was a 5.18 million bale month-over-month decline in world ending stocks which would be strongly price supporting according to economic theory and history.

The July revisions to 2018/19 U.S. cotton involved a 200,000 bale cut in carry-in, a 1,000,000 cut in production, and a partially offsetting 500,000 bale cut in projected U.S. exports.   The carry-in adjustment came from the increase in old crop exports.  The production adjustment resulted from replacing the Mar 29 planted acreage with the slightly higher June 29 number.  This should have marginally increased production, but USDA increased their projected abandonment in the Southwest region.  Combined with a slightly higher yield per harvested acre, the result was a nice round number cut of 1.0 million acres, month-over-month.  (In August the picture will begin to get messier when USDA replaces historical averages with actual observations of yield and abandonment.)  The bottom line was a month-over-month downward adjustment from 4.7 million to 4.0 million bales of ending stocks.  This adjustment would have bullish implications according to historical patterns, and the strong post-report response of ICE futures reflected this expectation.

Production Caveats.  New crop fundamentals are focused on the evolving production/supply situation. The benchmark for planted cotton acres is 13.5 million of all cotton (upland and pima combined).  Having established that, the question is what will be the harvested acreage and yield per harvested acre.  The first official estimates of those variables won’t be til the August WASDE.  In the mean time, analysts focus on weekly crop progress, subjective condition ratings, and weather.  Current planting progress (for the week ending July 8) shows slightly above average rates of squaring and boll setting across the Cotton Belt.  Crop condition ratings for Texas are on a downtrend, and bad relative to recent history (see chart below).  For what it’s worth, such crop condition ratings don’t always correlate well with the resulting State yield.  U.S. crop condition ratings show 41% of the U.S. crop rated “Good” to “Excellent”, with another 32% rated “Fair”.

Weather.  Monday July 9 and the preceding weekend saw scattered showers from New Mexico to the Atlantic seaboard.  NOAA’s current climate status and near-term forecast is ENSO neutral, meaning that we are in a normal good ol’ hot Texas summer.   (NOAA’s forecast also sees better than even odds of a wetter than normal Fall/Winter — let’s hope the 2018 crop gets harvested first.)  The current drought monitor shows widespread dryness, including moderate to severe drought conditions, across much of the western Cotton Belt. These effects are being reflected locally in the current regional assessments for northern and western Texas.  The cotton market remains focused on how dry it is in parts of Texas.  However, dry conditions and high abandonment in Texas happens regularly — roughly half the time in the last twelve years we have seen abandonment of over a third of Texas planted cotton acreage.  We have seen horrendously bad conditions that resulted in 40% to 50% abandonment in Texas (re:  2012 and 2013).  U.S. abandonment was correspondingly between 24% and 28%.  Applied to USDA’s current balance sheet forecast, it would still leave 3+ million bales of 2018/19 ending stocks.  While lower than 2017/18, it is higher than 2016/18.  Historically speaking, It is not a recipe for 90 cent futures, or even sustained futures in the upper 80s.

Globally, some major fundamental issues include the early arrival and slow progress of the Indian monsoon, and the degree of replanting/recovery of the weather-damaged crop in China’s Xinjiang Province.


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