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Cleveland: Of Export Sales, USDA Numbers and BCI

The script many of us wrote months back continues almost word for word. The market fundamentals have performed true to prediction, as has the occasional technical marker.

Somewhat new to the cotton market (and to all commodities as well) have been changes introduced, or rather inflicted, on the price discovery process of the very, very large speculator or fund manager. That phenomena has changed one’s approach to trading futures, but not to the how’s and why’s of grower and mill price risk management. As such, the 72.50 to 78.50 six cent trading range has held firm with only slight bleeding on either side of the range.

The range will continue to hold firm, although it is seeing some challenges to its top side at present. Exports and mill demand remain firm. Grower marketing has appeared very orderly. The only leak in the boat has been with respect to mill price risk management – and let’s just face it, that boat is battling a hole about the size of small elephant. Yet for all other traders, it has been blue sky, and blue skies lay ahead.

Too, with some tweaking regarding price discovery previously mentioned, the market is always right – if not at the end of today, then at the end of tomorrow. The trading range will continue, but trading is likely to become more interesting, i.e., more volatile.

U.S. export sales and shipments were out of sight this past week. Net sales totaled over half a million bales – yes, 509,100 RBs. The breakout was 367,200 RB of upland and 13,500 RB of Pima for 2016-17 shipment and 123,400 RB of Upland for 2017-18 shipment. Both sales and shipments are simply outpacing the USDA estimate, an estimate that simply plays catch up month after month and year after year. USDA is simply going to have to become more aggressive in its research if its export estimates are to be taken as anything other than guesses. The Department, agency and staff are simply too professional to not devote more attention to developing an accurate estimate.

The USDA estimate is sacrosanct to the market, as it should be, while the estimate of analysts and those like myself are little more than a cheap window dressing. Yet, USDA is allowing its export estimate to actually be nothing more than a near wild guess. The forthcoming March supply demand estimate will be interesting, in that it will give one a view as to whether USDA will accept its responsibility or, like this year’s mills, just kick the can down the road.

It is not a right or wrong issue – remember Yogi Berra’s comment, “Prediction is difficult, especially when it is about the future.” Any discussion of their analysis should begin with the comment that “these are the USDA numbers,” rather than “these are the USDA numbers, and you know they have just seemed to always not be very good.”

For the record, I sincerely always hope the USDA estimates are much better than mine. The staff is too good to produce anything other than solid logical estimates. Too, they are held to a different standard than industry analysts. Yet, if their history is one of always playing catch up to the actual export estimates, then their history is nothing other than providing damaging information to the market – again, because they provide the world with the what the market wants to “feel” are research-based unbiased results.

Granted, sales do not always get shipped, and that does complicate their work greatly. But small changes month after month, after month, after month and finally arriving at a calculation others have had for some time, may be suggestive that the big picture of forecasting is being missed.

The latest CFTC Cotton On-Call Report shows that textile mills are simply wearing out their shoes kicking the can down the road. With May now being the spot month, May on-call sales outnumber on-call purchases 8 to 1. The July ratio is an untenable 16 to 1, and the combined May/July ratio is over 11 to 1. This is now even more bullish than when March was the spot month.

I do not want to suggest that the spot May or the July contract will break above the 78 cent resistance. Personally, I do not think it will! However, it is easier to make the case for such. Still with all this excitement, growers generally would have been just as well off by pricing in late November as compared to holding until now. Futures will have to drive through the 78.50 cent barrier to become “better off” than they would have been in November.

The December new crop contract is tethered to the old crop July, and the old crop-new crop spread will continue to keep the December crop near the 73.50-74.50 cent range. December also finds price support, in that present conditions make it possible that exportable supplies come the 2017-18 marketing year could be too small. It is doubtful such will happen, and would take dreadful weather conditions for such to occur, but we are working with a rather nervous market. Yet, an excellent start to the growing season could take 5 to 7 cents out of the market in a short time.

USDA (now they are my friend) provided an aggressive estimate of 2017 estimated plantings this past week. They forecast 2017 U.S. planting at 11.5 million acres – 100,000 more than me, and I thought I was higher than anyone. The U.S. should give very serious consideration of seeing a 19 million bale harvest.

Too, a repeat in 2017 of the 2016 harvest season could take 10 cents out of the market. Thus, I continue to advise that at least 50% of the expected 2017 production be priced NOW. The 74 cent opportunity will erode. Trading differences make me think the erosion may have begun. Such price erosion will be slow, but once that topsoil is gone, you will not get it back.

A quick note on BCI, Better Cotton Initiative. The benefits will be net positive for the U.S. cotton industry. The negative environmental comments of cotton were near identical the exact same ones heard for the past 15 years, and not a single cotton leaders group could refute a single one of them. If from no other venue, BCI membership will help identify cotton growers as excellent stewards of the environment.

Yes, I know you/they/we already are. However, as an industry we have sat back with our big boy pants on and allowed our premiere stewardship to be cast in such a light that U.S. cotton is viewed as (tongue in check) the world’s primary environmental polluter via chemicals, pesticides and of wasteful water practices. It is cotton’s problem.

We cleaned it up, but no one – not even the industry – came forward to proclaim the success. Now BCI will do it for us, and when the King abdicates, there is more than just a little work to do to put Humpty Dumpty back on his throne.

We need them more than they need us. That is a sad, but accurate, comment.

There are excellent pricing opportunities for both old crop and new crop. Both markets are telling you they are hungry. Please feed them a feast.

Give a gift of cotton today.

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