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 it now appears to be on an expected path to whittling down the reserve in a fairly transparent and least disruptive manner.
Supply Uncertainty. The remaining supply question implies some, but probably not large, adjustments to the size of the 2017 crop. Since the crop was late, and since there is inadequate ginning capacity in places like Kansas and Oklahoma, it may take a few months for USDA to reconcile it’s own projection of 21.26 million bales of U.S. all cotton production with the USDA-AMS reported cumulative classing of 19,130,845 running bales (or 19,896,079 statistical bales) as of the week ending February 15. The more lagged USDA-NASS ginnings data reflect 19,436,456 ginned statistical bales (i.e., 18,688,900 ginned running bales of upland and pima cotton combined, as of February 1).
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 3.35 million bales. Exports are generally a more important source of demand as they represent 81% of projected total use of 2017/18 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 February 8 was just below the pace needed to reach USDA’s cumulative 2017/18 year target for U.S. exports. U.S. new net export sales were very good at 367,600 running bales of all cotton. Since this coincided with somewhat lower prices, it fits the normal expected response from demand theory. Lastly, the combined indicator of both accumulated exports and outstanding sales (i.e., sales booked but not yet shipped) continued at a relatively high percent of total forecasted U.S. exports. This remains a relatively bullish indicator of export demand.
Ending Stocks. In historical terms, it seems very likely that 2017/18 cotton ending stocks-to-use will be 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. Nevertheless, we have seen almost a four cent rally in ICE futures since mid-November. This has been attributed to continuing good export demand and a strong cash market. If the pattern of export sales remains above par, it will ultimately result in greater exports and lower ending stocks than are currently forecasted. However, it remains to seen whether the historically high total commitments of U.S. cotton are just front loading of sales in response to what was an overly bearish market outlook, and the rationing of limited quality supplies in the cash market.