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 November 9 continued to be sub-par for needed weekly pace to achieve USDA’s target of 14.5 million bales by July 31, 2018. It may be due to a combination of late crops and weather-disrupted early new crop production, i.e., from Hurricane Harvey. For for the week ending November 9, U.S. new net export sales set a marketing year high at 524,800 running bales of all cotton. In keeping with demand theory, the recent fluctuations in export sales are mostly in line with the expected response to observed price shifts, albeit this most recent spike in export sales looks independent of price variations. Lastly, the combined indicator of both accumulated exports and outstanding sales (i.e., sales booked but not yet shipped) is currently at a relatively high percent of total forecasted U.S. exports. This is a bullish indicator of export demand.
Crop Progress and Condition. For the week ending November 12, U.S. harvest pace was on par with the five year average by at 64% harvested. U.S. crop conditions ceased being reported by USDA, but Texas cotton condition ratings were noticeably higher, week over week (see blue line in the chart below). However, the same chart shows that both the weekly variations and the annual comparisons of Texas condition ratings do not necessarily correlate with the yield outcome. Still, NASS’s field sampling and weekly ginnings data support the possibility of a high average yield in Texas.
The impact of Hurricane Harvey on Texas cotton remains uncertain, which is rather unusual. after this many months. Yet this uncertainty may continue. USDA’s October crop production report only reflected 50,000 fewer bales in the Texas Upper Coast, compared to September. Per the USDA-NASS office in Austin, TX, the bale losses from Harvey may be lot smaller than previously expected, and/or the bale losses will be reflected in later USDA reports, such as the more comprehensive December report. USDA is also waiting for continued ginnings data. All of this implies that the process of assessing Harvey will take more time, and that may keep a weather premium in the futures market.
The other big source of uncertainty is the outcome of late developing cotton in West Texas with above average boll loads. The region experienced some freezing temperatures over October 9-10, but agronomists stress the real impact has already happened in the form of an unusually cool and cloudy August and September. The final coups de gras is the cold front that brought sub-freezing temperatures on October 27-28. It will still take weeks to size up the production potential that is out there. But as discussed in the October Ag Market Network, this production uncertainty may keep ICE cotton futures supported by a weather premium for the remainder of the fall. It still seems quite possible, however, that U.S. crop will still be 20-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.