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 21.03 million bales of U.S. all cotton production with the USDA-AMS reported cumulative classing of 20,163,085 running bales (or 20,969,608 statistical bales) as of the week ending April 12. The more lagged USDA-NASS ginnings data reflect 20,288,425 ginned statistical bales (i.e., 19,508,101 ginned running bales of upland and pima cotton combined, as of March 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 March 29 remained above the pace needed to reach USDA’s cumulative 2017/18 year target for U.S. exports. U.S. new net export sales were lower at 180,300 running bales of all cotton. The week-over-week adjustment 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) remained at a relatively high percent of total forecasted U.S. exports. This remains a relatively bullish indicator of export demand, suggesting that USDA’s target of 15.0 million will be raised.
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 a notable rally in ICE futures since mid-November, 2017. This has been attributed to continuing good export demand and a strong cash market.