The month-long free fall in cotton prices continued through the end of the week and set the stage for further deterioration in the coming weeks.
With December futures now at 68 cents, a drop to 65 cents is all but certain. However, the real bloodletting has been done, and the 63.50 to 65.00 cent level should provide good price support both from a technical and fundamental prospective.
This week’s excellent export sales report indicates a major increase in sales in the face of declining prices. The sales report for next week should be just as strong. Additionally, the July supply demand report released July 11 was directly in line with market expectations. As a result, while December futures were modestly down, it was the second most “positive” day in some two weeks for the contract, which has suffered through a number of triple digit daily losses.
In its July supply demand report, USDA increased its estimate of U.S. production 1.5 million bales, up to 16.5 million. Domestic consumption was raised 100,000 bales to 3.8 million, and exports were increased 500,000 bales to 10.2 million. These estimates are projections that focus on a full year away and, as always, will change.
Carryover for August 1, 2015 was estimated at 5.2 million bales, up from the 4.3 million bale carryover expected on August 1, 2014, or a 900,000 bale increase in stocks during the 2014-15 marketing year. Exports were increased to 10.2 million bales, up from 9.7 million last month.
Additionally, with the larger U.S. crop and the increased need by Chinese mills for quality cotton to mix with lower quality Chinese stocks, U.S exports could climb possibly as high as 11.2 million bales. The bigger the crop, the bigger the export volume.
Of course, USDA will adjust these estimates each month, and significant changes are expected as more information regarding crop production and consumption becomes available. Many feel the U.S. production should be at least one million bales greater, up to 17.5 million. Should Mother Nature provide excellent weather conditions, then the U.S. crop could balloon to 18 million bales or more.
The market will devote keen attention to crop conditions not only in the U.S. but also around the globe, with particular emphasis on the crops in India, China, Australia, Brazil and Central Asia. Presently, the market is focused on Indian and U.S. conditions, with a look at China in the background.
The 1.5 million bale increase in the U.S. production estimate translated to only a 500,000 bale increase in estimated world production over last month. World production was estimated at 116.4 million bales, compared to 118.3 million last year. The failure of the Indian monsoon to date resulted in a 500,000 bale reduction in USDA’s estimate of the Indian crop. A 300,000 bale drop was noted for Brazil, and a 400,000 bale drop in the estimated Australian crop was also included.
Again, these estimates will change.
To date, the most likely change will come from India, as some 60 percent of Indian plantings have received little to no monsoon benefit this year. Other regions have received scatted moisture ranging from excellent to only a very little. Similar to the Texas Plains absolutely needing moisture by June 1, Indian plantings need significant monsoon showers by early to mid-July. Time is rapidly fading for the Indian crop, and its ultimate size has already been reduced. Another two to three weeks are required to determine just how much production will be lost. Estimates are that as many as another three million bales more will be subtracted from the Indian crop.
World consumption was estimated at 111.3 million bales, down from last month’s estimate of 112.3 million, or a surprising drop of 1.0 million bales. Longer term this season, the larger crop-lower price scenario will result in an increase in consumption well over the current USDA estimate. Additionally, USDA continues to maintain only an 8.0 million bales estimate for Chinese imports, compared to 20.3 million in 2012 and 13.5 million in 2013. The poor quality of the 2013 Chinese crop, coupled with the aging of other Chinese Reserve stocks, will mandate imports to mix with local cotton in order to make quality yarns. The imports have become a necessity for Chinese mills attempting to provide yarns for the world market.
World consumption should climb another 500,000 to one million bales. The bloodletting has ended, but the road to higher prices will have a battle at 68 cents and again at 71 to 72 cents.