Policy Uncertainty. The last seven years have been a case study in how foreign government policies have influenced the cotton market. Several major examples are India’s domestic minimum support price program, China’s stockpiling policy, the 2018 U.S. farm bill, and the U.S.-China trade war. The latter 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 only a small adjustment to U.S. production in the May WASDE report, I expect only very minor possible adjustments from here, i.e., to reconcile the discrepancy (currently 76,425 statistical bales) between U.S. Ginnings (circa May 10) and the WASDE estimate. A more updated comparison is U.S. Classing Data (as of May 3) that shows a 118,400 discrepancy in statistical bales from the April WASDE forecasted production of U.S. All cotton.
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 3.10 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 May 30 remained below the level needed to reach USDA’s cumulative 2018/19 year target for U.S. exports. The likelihood of sustained necessary shipment levels during May-July is not very good considering history (see below). Hence, we may not reach USDA’s target of 14.75 million statistical bales of exports in 2018/19.
New net export sales for delivery in the current marketing year were un-spectactular but seasonally normal at 184,300 running bales of all cotton (upland and pima combined) during the week ending May 30. 75% of these new sales were from India. The pattern of export sales and price follows the expected response from demand theory. 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.