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 final USDA-AMS reported cumulative classing of 20,316,765 running bales (or 21,129,436 statistical bales) as of the week ending May 3. The May USDA-NASS Cotton Ginnings report data reflect 21,259,004 ginned statistical bales (i.e., 20,441,350 ginned running bales of upland and pima cotton combined). These latter figures suggest that USDA’s production 2017 U.S. cotton production estimate needs to be raised another 339,000 statistical bales.
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 over 80% 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 July 5 was below that needed to reach USDA’s cumulative 2017/18 year target for U.S. exports. U.S. old crop net export sales were low, which fits the seasonal pattern. The short term pattern of export sales fits the expected response from demand theory, and it also (perhaps mostly) reflects the normal decline in old crop sales for delivery in this marketing year. 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.
Ending Stocks. In historical terms, it seems very likely that 2017/18 cotton ending stocks-to-use will be at least a million bales 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, especially in the month of May. This has been attributed to continuing good export demand and a strong cash market.