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.
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 September 14 continued to be sub-par for needed weekly pace to achieve USDA’s target of 14.2 million bales by July 31, 2018. However, export shipments are seldom distributed evenly through the year, and the marketing year is still young. For the week ending September 14, 2017, U.S. new net export sales spiked higher at continued mediocre at 278,400 running bales of all cotton. In keeping with demand theory, the recent fluctuations in export sales are in line with the expected response to observed price shifts, albeit around a flatter, lower trend than during early 2017.
Crop Progress and Condition. The recent weather in Texas has been just what the doctor ordered, for crop maturation and/or harvest, i.e., dry and warm. For the week ending September 17, U.S. boll opening lagged the five year average pace by seven percentage points. The U.S. cotton condition ratings dipped a little for a second straight week, but still show a strong majority of U.S. cotton rated as “Good” to “Excellent” , with another quarter rated “Fair”. Texas cotton condition ratings showed a slight uptick, week over week (see the graph below). Assuming the latter have accounted for damage from Hurricane Harvey, then perhaps (being weighted by acreage) they also incorporated improving conditions for the West Texas crop. In general the pattern of crop condition in Texas follows that for the U.S., although as the chart shows, the weekly variations in condition do not correlate very well with the yield outcome. Thus, the million dollar question is whether the 2017 yields remain as strong as forecasted in the September WASDE.
The impact of Hurricane Harvey remains uncertain, and will likely include both yield loss and quality loss. Likewise, the potential damage from Hurricane Irma to the Southeast presents a similar source of uncertain yield loss and quality degradation. This uncertainty will continue for at least a month or so. USDA noted in their September Crop Production report that crop data from hurricane affected areas was incomplete. USDA will supplement this with extra surveying of harvested crops for the October Crop Production report, but even then it may take time for the crop insurance adjustment process to sort through all the damaged, but gin-able, cotton.
Production. The evolution of opinions about U.S. production has followed the usual benchmarks from USDA. The May and June WASDE new crop projections assumed USDA’s March 31 estimate of 12.2 million acres of all cotton. USDA further assumed ten year average abandonment, weighted by region and adjusted downward in the southwest to only 10% to account for favorable moisture. That resulted in 19.2 million bales of production. Prior to the August WASDE, the average opinion of U.S. analysts was 18.8 million bales of U.S. production based on expectations that there wasn’t enough time left to mature a potentially large crop. It was therefore a surprise when USDA projected 20.6 million bales in the August WASDE, although that report was still discounted by doubts about the crop fulfilling its potential. USDA’s September forecast was also surprisingly high at 21.76 million bales (+1.2 million, month-over-month). Per USDA, this increase reflects increased productivity outside of the areas affected by Hurricanes Harvey and Irma. So there may be some reductions in the October forecast. But as discussed in the September Ag Market Network, the reductions may not be as large as previously expected. The U.S. crop could still wind up with twenty something million bales, which may eventually weigh on ICE futures, especially the more deferred futures contracts.
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.