Fundamentals do matter after all.
USDA’s annual June 30 planting report sent cotton prices to triple digit gains at week’s end after consecutive very bullish weekly export sales reports had been met with lower prices. Yet, it was the smaller than expected U.S. cotton plantings and the foretelling smaller crop that caught the market’s attention.
The price equation, it turns out, was craving supply news and had been fading the recent strong demand factors. Hindsight suggests we should not be surprised, as all of the 2017-18 marketing year news has centered on the impending increase in world production/carryover, as well as similar news from both India and the U.S. – two of the world’s three largest producers.
The Chinese crop will also be larger, but the continued success of the Chinese National Reserve sales will take Chinese carryover lower.
The potential for the U.S. crop to fall below 19 million bales brought new ideas that the 69-70 cent price level, basis December futures, would be challenged again. In fact, it brought new life to the idea that December can once again trade to 72-73 cents. Certainly, the fear of falling below 65 cents was put on the back burner for now. Yet, it is just July 4, the time for much of the U.S. acreage to begin blooming, so Mother Nature still remains the single market fundamental that will dictate price direction.
The June plantings report indicated U.S. plantings were some 12.06 million acres, or 178,000 acres less than the March plantings intentions report and about 250,000 acres less than the estimate the market had been trading.
Total U.S. plantings were 20% above 2016 plantings. Texas plantings were up 950,000 acres from 2016, totaling 6.617 million; Georgia at 1.35 million, up 170,000; and Mississippi at 550,000, up 115,000. Oklahoma and Alabama rounded out the five largest states by area planted at 470,000 and 450,000 acres, respectively. Florida, with total plantings of 90,000 acres, was the only state with reduced plantings from the prior year.
Crop progress has seen deterioration, but major parts of Texas did receive excellent rains. The wide reaching Texas District 1S continues to face some difficult moisture issues. Further, as Oklahoma is one of the top five states by area planted, it is noted that the east/west Texas/Oklahoma boundary (a portion of the important Rolling Plains) is one the major cotton drought-stressed areas in the U.S. Cotton Belt.
The once expected 19.2 million bale crop could still be harvested, but immediate evidence places the crop much closer to only 18 million bales. This, coupled with the near record pace of forward U.S. export sales, will create immediate pressure for higher prices in the December contract.
The increased crop size coming from the world’s largest producer, India, will work to offset that pressure. However, that crop will not be available to the market in time to prevent a market inversion in the December-March futures spread. Additionally, while the Indian monsoon is progressing, some areas have not received as much rainfall as normal. Yet, the northern movement of the monsoon does suggest the problem will probably be alleviated.
Nevertheless, the Indian crop – about 160% larger than the U.S crop – is under the direct control of Mother Nature, just as is the U.S. crop. It is expected that the big Indian crop will soon begin to compete with U.S. growths in the export market, but many Indian merchants are taking a wait-and-see attitude due to monsoon. Too, the Indian crop will compete more on the March contract (first quarter 2018 delivery) rather than the December contract, thus the potential for the December-March inversion.
However, just as last year, the current export sales rate for U.S. cotton far surpasses the USDA estimate. The current sales rate projects U.S. export sales at 15.7 million bales, or more than 2 million bales more than the current USDA estimate. It is worth noting that the 2016-17 pace was maintained all year. Yet, as previously discussed, it is likely that USDA will again have to substantially increase its 2017-18 U.S. export estimate, probably in excess of 500,000 bales.
Yet, I again caution that a typical Indian crop, given planted area, will slow the pace of U.S. export sales. After all, current 2017-18 export sales already on the books accounts for approximately 35% of the expected 18 million bale U.S. crop. U.S. cotton merchants will remain very aggressive sellers rather than hold cotton with the market inverted.
U.S. export sales have totaled about 1.25 million bales the past two weeks. Both immediate shipment and third quarter shipment requirements suggest mills are poorly covered for the third quarter requirements and only somewhat covered for fourth quarter. This too will continue to support December’s attempt to move above 70 cents.
Too, it is very likely that Chinese mill use is running much stronger than indicated by USDA estimates. China has shown no letup in purchasing U.S. cotton. Given the demand by the new Xingjian mills, there is no reason to suggest that U.S. cotton will not continue to be in strong demand.
Logically, it seems that the pace of U.S. sales must slow, but the pace never slowed during the 2016-17 season. It may be that my all-out push to price 25% of the 2017 crop above 73 cents and the remainder above 75 cents was too much, too soon. Yet, any return above 72 cents will certainly generate intense pricing interest again. And – even better news – the 2018-19 marketing season is suggesting that demand will beg for even more plantings.
Give a gift of cotton today.