Cleveland: USDA Report Throws Curve Balls at the Market
August 14, 2012 USDA threw nothing but curve balls at the cotton market with its August supply demand report, releasing a bearish report when most participants were expecting bullish news. The report took some two cents from the market, thus, nullifying gains made during the week. As is typical, we will take pot shots at USDA estimates, but remember USDA statistics rule. Nevertheless, USDA does indicate that estimates are as of August 1, 2012 and time continues to tick. The market has now tasted the 75-76 cent level, and liking the flavor, will be back at the trough for more tasting. December has not finished growing its bullish horns. The market will continue to see an upward growth in prices as concerns regarding the Indian and West Texas respective droughts as well as what is believed to be some early cut out in the Mid-South. A majority of technical signals have turned from “neutral” to “buy” in the cotton market.
The consensus pre-report U.S. crop size was 16.6-16.8 million bales. USDA calculated 17.7 million, a million bales plus more than expected by the market. USDA did increase the 2011-12 exports to 11.7 and lowered ending stocks to 3.3 million bales as suggested last week. However, USDA could not find any use for the increase in U.S. crop size (leaving 2012-13 exports and domestic use unchanged), thus increasing its estimate of 2013 carryover stocks to 5.5 million bales, up from its July estimate of 4.8 million.
If bearish U.S. numbers were not enough, the USDA report piled on a bit as it increased the world crop to 114.1 million bales, up 300,000 above the prior month’s estimate. The major surprise was that USDA decreased it estimate of the Indian crop only slightly to 23.5 million bales. Analysts seem to feel that the Indian crop will be no more than 22.5 million bales, and likely lower. However, USDA moves are slow and very deliberate this early in the “estimating season,” and I admit that is most likely the best policy. The policy is certainly time tested, but does not always provide statistics that actually come to fruition. The point is that there is still almost an entire crop growing season left. We have moved through May, June and July only. Thus, August through January – seven more months – remain. Some would take that only through December. OK, so there are six months remaining in the 2012 Northern Hemisphere cotton production season and some 10 to 11 months if the Southern Hemisphere crop is considered. Yet, the table is set for production disappointments far beyond USDA’s current forecast.
Crop insurance adjustors are already active in Texas cotton fields. They are not dealing with the 2011 drought disaster, but more than a few dryland growers will be zeroed out and will not have any production. A check with analysts after the USDA release still had the crop down to 16.6 million bales and getting smaller.
The market will continue to give and take while Mother Nature decides if she will allow the crop to come back or not. If she does not, then look for smaller and smaller crops both in the U.S. and in other countries. However, as previously stated, the table is set for higher prices.
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