Policy Uncertainty. The last seven years have been a case study in how foreign government policies have influenced the cotton market. Three two major examples are India’s domestic minimum support price program, China’s stockpiling policy, and the 2018 U.S. farm bill. The China story was the dominant thing hanging over the cotton market between 2012 and 2018, 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 are changing focus from the production/supply situation to the trade/demand side. There still may be a few more revisions to production as USDA gets more ginnings data. 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. With no adjustments to U.S. production in either the March or April WASDE reports, I expect only very minor possible adjustments from here, i.e., to reconcile the discrepancy (currently between 300,000 to 400,000 statistical bales) between U.S. Ginnings and the WASDE estimate.
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 3.30 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 April 11 remained below the level needed to reach USDA’s cumulative 2018/19 year target for U.S. exports. New net export sales for delivery in the current marketing year were decent, but lower at 231,900 running bales of all cotton (upland and pima combined) during the week ending April 11. The pattern of 2018/19 export sales generally fits the expected response from demand theory in that quantities demanded move in opposite direction of price. The combined indicator of both accumulated exports and outstanding sales (i.e., sales booked but not yet shipped) is at a historically normal percent of total forecasted U.S. exports for this time of the year.
Ending Stocks. If USDA cotton production remains at forecasted levels, then 2018/19 cotton ending stocks-to-use will match the level for the 2017/18 marketing year. History shows that a 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.