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 Phase One Agreement, the U.S. Market Facilitation Program, and the U.S. CARES act funding. A more recent example is the Chinese tariffs on Australian cotton imports.
Harvest is over. Ginning is winding down. And yet there is an unusually late and large amount of uncertainty about the size of the U.S. cotton crop. The uncertainty relates to a discrepancy between USDA’s December projection of 15.95 million statistical bales of U.S. production versus the mid-December levels of bales classed (10,865,466 statistical bales, see below) and bale ginned (11,930,000 statistical bales). A gap of this size has happened a few other times in history, but those situations involved large and late crops when there was still a lot of time and bales to close the gap. This discrepancy was only partially resolved in the January WASDE, i.e., with the large cut in U.S. projected production. The latest U.S. all cotton comparison is 13,782,665 statistical bales classed (as of January 14) compared to the January NASS projection of 14.95 million bales of production. That leaves a 1.1 million bale discrepancy between AMS and NASS.
The graph below shows how USDA’s U.S. cotton production estimate varies, higher or lower, from it’s initial August estimate. In years where the estimate gets smaller (like in 2020), the average downward adjustment over eleven months is 6%. Compared to USDA’s August estimate of an 18 million bale crop, the average downward adjustment would be over a million bales. We have seen over twice that level of downward revision so far in 2020, which is an above average amount of trimming.
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 2.7 million bales. Exports are generally a more important source of demand as they represent over 85% of projected total use of 2020/21 U.S. cotton. The main indicators of export demand are weekly sales and shipments of U.S. cotton. The most recent week of export sales (through January 7) were strong, especially considering the concurrent price rally. The pace of actual export shipments of all cotton (i.e., upland and pima combined) was a bit under par for the week ending January 7.