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Shurley: Is This the Wake-Up Call We’ve Been Expecting?

Many years ago, a young man didn’t take his schooling serious enough and ended up spending some time at lovely Fort Polk, LA. That young man was me, and that was my wake-up call. It forever changed my life.

I believe the cotton market might be getting a wake-up call right now. We’ve been hinting that sooner or later the market might finally adjust to the different dynamics of the 2017 crop. The past week has certainly not been kind to cotton prices.

Beginning on May 5, new crop December futures prices declined four consecutive days, dropping a total of 242 points before finally eking out a small gain on May 12.

USDA released its May crop production and supply/demand estimates on May 10. After the report, December futures declined from near 73 cents to close at 72.33 cents – down 71 points for the day. Prices recovered to almost 73½ cents, but could not hold and ended the day with just a slight gain.

This is not an encouraging sign.

But, there is a level of support at 72 cents. Thus far, that floor has held, and hopefully it will continue to do so. It’s important to remember that the dynamics that will shape the 2017 cotton market are fluid and highly uncertain. As evidence, USDA projects the 2017 crop U.S. average price to be 54 to 74 cents.

The May report provided the first estimates for the 2017 crop. The crop is estimated at 19.2 million bales – up just over 2 million bales from the 2016 crop. Not really surprising here, given the expected 21% increase in acres planted – 19 million is about the number most folks have been anticipating as a starting point.

Projected exports for the 2016 crop year were raised from 14 to 14½ million bales. Worth noting, exports for the 2017 crop year are projected at 14 million bales – a respectable level, but below the 2016 crop year. The larger crop and reduced exports will raise U.S. ending stocks to a projected 5 million bales – 1.8 million bales more than this season.

We’ve said here all along that with a bigger crop comes the burden of needing higher usage to keep prices at a high/respectable level. It is possible, before it’s all over, that 2016 crop year exports could push even higher than 14½ million bales. This will reduce the carry-in to the 2017 crop year and help support prices.

As of May 4, export sales already totaled over 14½ million bales with 12 weeks remaining in the marketing year. The pace of sales has slowed, but that’s to be expected. Actual shipments total 11 million bales – 76% of the new USDA projection and on pace to meet or exceed the projection.

Elsewhere in the May report – and here are the uncertain dynamics in play – projected world use/demand for the 2016 crop year was revised up 600,000 bales; the India crop was lowered 500,000 bales; China mill use was raised 750,000 bales; China imports raised 300,000 bales; and 2016 crop year projected ending for China lowered almost 500,000 bales.

All in all, these are certainly not bearish numbers. Any “downers” in the report, if any, would seem to be associated with the upcoming 2017 crop year:

  • World production is projected to increase 7.34 million bales, with largest increases in U.S., India, China, and Turkey.
  • World use/demand is projected to increase 2.55 million bales – China up 500,000 bales, Vietnam up 600,000 bales, and Bangladesh up 400,000 bales.
  • The increase in production will outpace the increase in demand by almost 5 million bales, but use/demand will still be 500,000 bales more than production.
  • But, this compares to a 7.3 million bales demand more than production this season.
  • China is forecast to import 5 million bales, compared to 4.8 million this year and 4.4 million for 2015-16.
  • China ending stocks are forecast to decline by 9 million bales. Stocks are projected to decline 9½ million bales this season.

It’s difficult to see much bearishness in these numbers. Yes, production is expected to increase, but so is use. Production and use will be in much closer balance, but stocks are projected to continue to dwindle down. The U.S. crop, if realized as projected, will be big with no increase in exports expected, so U.S. stocks will increase. This could put a little pressure on prices.

Moving forward, the market will begin to focus on three things – U.S. crop plantings and condition; signs that use/demand is or is not showing continuing signs of recovery; and expected higher foreign production in key countries.

Is this our wake-up call? The actions of the past week would suggest so, but I also see some positives in the outlook. USDA’s suggested possible price range of 54 to 74 cents says anything is still possible. I’ll feel better if the support at 72 cents holds.

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