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 a dominant thing hanging over the cotton market since 2012, but has since been on an expected path to whittling down the reserve in a fairly transparent and least disruptive manner. More recently, 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.
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 3.30 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 reports of which have resumed after the federal government shutdown. The pace of actual export shipments of all cotton (i.e., upland and pima combined) for the week ending December 27 remained below that needed to reach USDA’s cumulative 2018/19 year target for U.S. exports. New net export sales for delivery in the current marketing year were decent at 236,300 running bales of all cotton (upland and pima combined) during the week ending December 27. The pattern of 2018/19 export sales generally fits the expected response from demand theory in that quantities demanded move in opposite direction of price. The combined indicator of both accumulated exports and outstanding sales (i.e., sales booked but not yet shipped) remains at a relatively high percent of total forecasted U.S. exports for this time of the year. This remains a relatively bullish indicator of export demand, although the large outstanding sales are still subject to risk of cancellations, e.g., by China in the wake of unfolding trade disputes.
Ending Stocks. If USDA cotton production remains at forecasted levels, then 2018/19 cotton ending stocks-to-use will match or exceed the level for the 2017/18 marketing year. History shows that an increase in ending stocks and stocks-to-use is typically associated with price weakness. SA 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.
Foreign/World Situation. And since cotton is a global crop, we should always be trying to keep up with developing foreign supply and demand issues. For the 2018 crop, there are questions about India’s supply situation, both in the measurement of historical stocks by USDA and in risks to the current production.