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July Supply Demand Report Proves to Be a Bear in Bull’s Clothing

The big bull report day turned into a date with the big bear with the release of the July USDA supply demand report.

The market was up some 125 points just before the report was made public, then headed south afterward, moving down some 150 points just thirty minutes after the report was released. Trading slipped into the 65.50 area, basis the ICE December contract.

USDA made only slight changes, while most in the trade were left surprised. While one well past-due change was made – increasing U.S. exports – most felt the USDA adjustments were too little, too late. Time will tell, and we will see.

The long standing six-cent trading range remains in force, and prices should be expected to continue their movement between 68.50 down to 62.50 cents. Too, the 64.00 to 65.00 cent support level should prove to be sufficient. Likewise, the market will continue to reach for a close above the resistance at 68.50.

USDA increased its estimate of U.S. exports by 300,000 bales, 200,000 less than expected. Exports are on track to climb to 11.3 million (11.289) and have averaged well over 200,000 bales during the recent months. Weekly shipments need to average just 200,000 per week for the remainder of the marketing year (four more weeks) to reach 11.3 million – again, 300,000 bales above the current estimate of 11.0 million.

Apparently USDA feels exports will average just below 100,000 bales during the final four weeks remaining in the marketing year. The industry questions this assumption, especially given USDA’s recent history of having to make such large adjustments to exports late in the marketing season.

The impact of this decision was to lower 2014-15 carryover to 4.2 million bales, as the July estimates also included a reduction in U.S. domestic consumption of 100,000 bales (down to 3.55 million). Most were expecting U.S. carryover to fall to 3.8 to 4.0 million bales. The market views a U.S. carryover above 4.0 million as easily manageable. But one of less than 4.0 million bales generates upside price nervousness.

The estimates did include a further reduction in Chinese consumption of 1.5 million bales, in line with expectations. World ending stocks were increased from 106 to 108 million for the upcoming season, principally on the lowering of Chinese consumption.

Very importantly – and I think little noticed – the USDA report effectively implied a decision not to review Chinese, Indian and U.S. production prospects. Thus, without any changes in the world’s largest three producing countries, the report left the cotton world with little to no meaning.

In defense of USDA, I feel their reluctance to change any production estimates was basically saying, “We do not know how much to adjust. We do see/hear that global weather conditions are playing havoc with production, but we do not have a solid basis to change. We may not agree with the estimates ourselves, but we do not have enough concrete data to allow us to make changes. Let’s wait another month.”

The U.S. crop continues to make excellent progress. Cotton in the Mid-South, and particularly in the Southeast, is making excellent progress. The Texas Plains will need a lengthy growing season, far longer than normal. Too, the long range weather folks, who have correctly nailed weather forecasts for that area the past five years, are calling for continued rain through the harvesting season. Coupled with cooler than average temperatures, the size of Texas crop comes into question.

Nevertheless, the trading range is expected to remain on track another four weeks, into the August supply demand report.

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