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 a 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. Here is a description of how the October crop production estimate was put together by USDA. The current estimate of planted acres (circa the October 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 November 25 continues to show the pace of harvest lagging the five year average pace by 7 percentage points. Crop condition ratings for Texas 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.
Weather. The week ending December continued to see unhelpful rainy conditions in California and the eastern Cotton Belt, especially over the Tennessee Valley. Texas had clearer weather to advance harvesting, although a strong Pacific front is bringing lots of rain as of this writing. At a minimum, the rains are a set up for a shortage of quality color grades (probably reflected in the cash market). Major storms like Hurricanes Florence and Michael have caused yield/production losses which may still take another month or so to fully account for. The continued wet harvest conditions may contribute to yield reductions from hard-locked bolls and boll rot.
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 November 29 was below that 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 sub-par at 117,300 running bales of all cotton (upland and pima combined) during the week ending November 29. 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) remains 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.