Cleveland: Bearish USDA Report Is a Bit Misleading
September 18, 2012 You’ve “gotta” love the cotton market, but it sure would be nice to understand it. Actually, the price discovery function of the New York ICE cotton contract appears to be working just as it should, or am I just biased? It would be incorrect for me to suggest that I understand the market, after all, I earlier confessed to being both dumb and stupid. However, I think the market is in step with its fundamentals. Be careful to agree with me. If you do that may mean you think economics works and, for sure, some do not want to believe that.
USDA released possibly the most bearish supply demand report ever on Wednesday of last week. The result was an immediate price drop of near 250 points. There was talk of 60 cent cotton and 65 cent cotton. Yet, Friday’s response was to recoup all the loss and then some. No doubt, to me at least, the cotton market has changed its focus some 180 degrees in the past three years, and the best analytical group in the world, USDA, is struggling to catch on. And they are not there yet. (Again, please do not take this to be unkind to USDA. They are the best and have a proven history. Remember too, I referred to myself earlier this year as dumb and stupid. It is just that the cotton world has been turned upside down, and all since the year 2000. Some might say it has been in just the past three years, but it been ongoing since about 2000).
China and India have become the largest and second largest cotton producing countries in the world, respectively, dwarfing the U.S. and all others. Likewise, they have become the largest and second largest cotton consuming countries, respectively, again dwarfing the U.S. and all other countries. Also, it was always well known in the industry that USDA statistics for China and India were educated guesses, totally without the accuracy of statistics USDA maintained for the U.S. cotton industry. However, the USDA educated guesses were the best available.
Through the years USDA has always had to go back and correct world cotton statistics because of the events in China and the Sub-continent. However, those corrections were typically not major shocks to the market, although the adjustments were occasionally major. Yet today, being the two largest producers and consumers, those shocks can be significant and/or misleading. The September cotton supply demand report, to me, rests in that category, a bit misleading.
What did the USDA report? They reported major changes in all global cotton statistics with essentially all meaningful changes resulting from both the 2011/12 and 2012/13 statistics for China and India. USDA raised the 2011/12 Indian production one million bales to 27.9 million, thus adopting the Indian CAB estimate.
Then, USDA adjusted 2011/12 Chinese consumption lower by one million bales, down to 39 million, and dropped Indian consumption some 400,000 bales. The final result was that 2011/12 ending stocks were increased 2.08 million bales, a massive end of the year adjustment. Of this increase, 1.77 million bales were due to changes in India and China. It has been noted on several occasions the past few months that USDA was making historically numerous and major adjustments in Indian statistics—and they continue to do so. Too, it should be noted that USDA accepted the Indian CAB production estimates, but did not use the CAB consumption estimates.
Most feel that USDA has severely underestimated Indian consumption as well as non-China Asian consumption. This will flesh itself out in the coming months, but in the interim the market was whipsawed the past three days. There is mounting current research that suggests Indian and non-China Asian consumption is expanding. The historical statistical models simply do not account for the changes in world production and consumption.
The report also cleared the air a bit relative to 2012 U.S. plantings. USDA planted acreage was adjusted lower by 275,000 acres. Too, the U.S. crop is now estimated at only 17 million bales, but may be working toward only 16.5 million.
The Indian spot price has now settled at 84 cents, suggesting that the Indian cotton industry is comfortable with its own CAB numbers and not those of USDA.
Yet, global stocks are a burden. They are large, possibly at record levels. However, last Wednesday’s break in prices generated large scale buying in the export market.
Growers should look at pricing in the upper 70s. The 74 to 85 cent trading range remains a good possibility. However, in order to break above 78-79 cents, basis New York, the monsoon must continue to be unkind to the Indian crop, as it was again this week.
Finally, the FED’s QE3 program (buying mortgage backed bonds) is nothing more than pumping money into the financial system in an attempt to generate business. One spin off is that with the increased money supply, more commodities will be purchased. Thus, commodities become a hedge against inflation as any increase in money supply implies a tendency toward inflation. The most notable commodities are gold and silver, but oil and all the agricultural commodities also catch some of the investor inflation hedge, i.e., increased buying of futures. Additionally, the value of the U.S. dollar also tends to decline as the U.S. is now buying “paper,” (mortgages with some being good and some being poor risks). As the value of the dollar declines the foreign buyer is able to get more dollars when exchanging his currency for dollars. Thus, the foreign buyer has more dollars than before the decline and can buy more cotton for the same amount of his local currency. Thus, the QE3 program is bullish for commodities.
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