Cotton trading was uneventful this week, in spite of the knee-jerk reaction to the USDA July supply and demand report. As is typical in a week with little news or trading activity, the release of any USDA report can weigh heavy on the market. The report was little changed from the prior month, but did contain some expected changes. Yet, since physical trading was light for the third consecutive week, the market was all but snoozing.
In response to the USDA report, the increase in both U.S. and world stocks shoved the market under water before prices recovered. The fundamentals are little changed, if any, from the past month or two. Thus, the well-entrenched 82-89 cent trading range remains the talk of the day. Look for little change in this at least until the first week of August.
Nevertheless, there are a number of factors on which traders will sharpen their focus.
The deteriorating cotton moisture situation in West Texas and Southwest Rolling Plains is drawing considerable attention from the market. Just this week, the market had the feel that the likelihood of a major disaster could no longer be prevented regarding the vast dryland crop. The potential for the best rain to hit the region in as many as 36 months was recently added to the weather equation. This potential for moisture is spread over the next five-to-six days, and only Mother Nature knows what her intentions may be.
Certainly, any rain will be too late for thousands of dryland acres. The irrigated acreage can always use supplemental water. But, due to the shallow depth of underground irrigation water, rainfall is a must in most cases just to get production up to between 1 and 1½ bales per acre.
Export shipments have lagged for the past three weeks, and this week was no exception. Thus, USDA had to lower its export estimate for the 2012-13 marketing year (ending July 31, 2013) from 13.6 million bales down to 13.3 million bales. Those 300,000 bales will be shipped, but will be switched to the 2013-14 marketing year. The effect was to increase U.S. carryover from 3.6 to 3.9 million bales as of July 31, 2013.
A surprise, however, was that USDA increased July 31, 2014 ending stocks by two million bales – from 92 to 94 million bales – primarily by increasing its estimate of 2013 Indian production by one million bales, despite the slowing monsoon. A slight reduction in 2013-14 world consumption and a slight increase in beginning stocks accounted for the other million bales.
With some 70 percent of the U.S. acreage in Texas and Georgia, growing conditions in those states will be the tale of the tape. Consumption remains strong enough to support the 81-83 cent price floor. Without any major rainfall in West Texas, look for the crop to sharply decline. Meanwhile, Georgia – along with the rest of the Southeast and Mid-South – needs a break from rain. Those crops are significantly behind. There is plenty of time to catch up, but yield reduction will begin ticking faster in ten days, and likely already has in Georgia.
As stated, the low 80 cent support will hold. However, the ever-increasing level of world carryover will limit price advancement above 90 cents, and odds are increasing that the December contract will not break the 90 cent mark.