Policy Uncertainty. The last five years have been a case study in how foreign government policies have influenced the cotton market. The two major examples are India’s domestic minimum support price program and China’s stockpiling policy. The latter has been the dominant thing hanging over the cotton market since 2012, but has since been on an expected path to whittling down the reserve in a fairly transparent and least disruptive manner. More recently, trade policy (e.g., tariffs or proposed tariffs) have been handing over various agricultural commodity markets, including cotton.
The 2018 crop fundamentals remain focused on the evolving production/supply situation. The current estimate of planted acres (circa the September WASDE) is 14.o4 million acres of all cotton (upland and pima combined). Having established that, the question remains what will be the harvested acreage and yield per harvested acre. With two samples of “proven yield” surveying behind us, the market will be focused on the upcoming monthly reports to refine the September benchmark. There will be more revisions over the next ten months as USDA gets more information from sampling, ginnings data, RMA data, etc. Historically, the revisions from this early August forecast the to following July can vary as much a 15% from the initial August estimate. The average variation, either higher or lower, is 6%, which is about 1.2 million bales.
In the mean time, analysts will still focus on weekly crop progress, subjective condition ratings, and weather. Crop progress for the week ending September 16 continues to show slightly faster-than-average boll opening and harvest pace for this time of the year. Crop condition ratings for Texas ticked higher week-over-week but continued lower 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 39% of the U.S. crop rated “Good” to “Excellent”, with another 29% rated “Fair”.
Weather. Recent rains have improved soil moisture conditions across Texas, which has left maturing cotton crops in northwestern Texas reportedly in improved shape. However, as cotton fields are increasingly defoliated and in open boll stage, more rain will begin to hurt quality. The week ending September 20 saw significant rainfall accumulations owing to the effects of tropical rains along the Texas Coast (where it is interfering with Upper Coast harvesting) and Hurricane Florence. The remnants of tropical moisture are forecasted to bring more rain to parts of Texas, Oklahoma, and Arkansas over September 21-23. The impact of Hurricane Florence remains to be seen, with over 1.5 million bales worth of cotton standing in Virginia and the Carolinas. 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; the Drought monitor ratings in Texas reflect an improvement over earlier in the spring. These effects are being reflected locally in the current regional assessments for Texas.
Demand Uncertainty. For U.S. cotton, the two main demand categories are domestic mill use and exports. Domestic U.S. consumption is estimated by USDA at 3.40 million bales. Exports are generally a more important source of demand as they represent over 80% of projected total use of 2018/19 U.S. cotton. The main indicators of export demand are weekly sales and shipments of U.S. cotton. The pace of actual export shipments of all cotton (i.e., upland and pima combined) for the week ending September 13 was below that needed to reach USDA’s cumulative 2018/19 year target for U.S. exports. New net export sales for the week ending September 13 were so-so at 101,100 running bales of all cotton (upland and pima combined). This fits recent anecdotal stories of slow business, and may be in part due to financial stress of major customers like Turkey. The pattern of 2018/19 export sales mostly fits the expected response from demand theory. Lastly, the combined indicator of both accumulated exports and outstanding sales (i.e., sales booked but not yet shipped) is at a relatively high percent of total forecasted U.S. exports for this time of the year. This remains a relatively bullish indicator of export demand, although the large outstanding sales are still subject to risk of cancellations, e.g., by China in the wake of unfolding trade disputes.
Ending Stocks. If USDA cotton production remains at forecasted levels, then 2018/19 cotton ending stocks-to-use will match or exceed the level for the 2017/18 marketing year. History shows that an increase in ending stocks and stocks-to-use is typically associated with price weakness. SA static pattern of ending stocks from year to year is generally associated with less price volatility, e.g., a “more of the same” price forecast.
Foreign/World Situation. And since cotton is a global crop, we should always be trying to keep up with developing foreign supply and demand issues. For the 2018 crop, there are questions about India’s supply situation, both in the measurement of historical stocks by USDA and in risks to the current production.