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, the 2018 U.S. farm bill, the U.S.-China trade war, and the U.S. Market Facilitation Program.
The 2019 crop fundamentals are heavily focused on the production/supply question. While the southwest region does have an above average level of standing cotton (i.e., relatively low abandonment), the yield potential of a lot of dryland acreage likely declined with the hot, dry conditions since mid-summer. The crop progress indicators through September 14 show on par or better rates of boll opening and harvesting. The impact of these hot, dry conditions are also reflected by continued slippage in crop condition ratings. U.S. cotton crop condition for the week ending September 15 showed 41% “Good-Excellent”, with another 42% rated “Fair”. Texas cotton condition this week show 31% “Good-Excellent”, with another 47% rated “Fair”. However, the chart below shows that the relative level of condition ratings across years is necessarily correlated with yield differences.
Besides the moisture question, other variables include the September-October maturation weather, the freeze date, and the incidence of tropical storm damage. Ultimately, there will be revisions to USDA’s production forecast. If history is a guide, USDA’s August forecast could be revised one to two million bales higher or lower. The historical average adjustment to the initial August forecast is 5% to the downside and 7.5% to the upside.
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 3.0 million bales. Exports are generally a more important source of demand as they represent over 80% of projected total use of 2019/20 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 12 was below the weekly average level to achieve USDA’s target of 16.5 million bales. However, we are very early in the marketing year. New net sales for the week ending September 12 were weak at 95,900 running bales of all cotton, but generally still following the expected pattern opposite pattern of price fluctuations. The most recent low level of prices suggests there should be more recovery in export sales — if we don’t see that eventually, it suggests a structural downshift in demand. At this point, the combined indicator of both accumulated exports and outstanding sales (i.e., sales booked but not yet shipped) is at a historically high percent of total forecasted U.S. exports for this time of the year.
Ending Stocks. If USDA cotton production and exports remain at forecasted levels, then 2019/20 cotton ending stocks-to-use will be a lot higher than the level for the previous two marketing years. History shows that a large year-over-year increase in ending stocks from year to year is generally associated with price weakness.