USDA Report Stuns Market. Now, Wait for Reality.
August 14, 2017 Rain makes grain. And cotton too, it seems!
The market was stunned on the August WASDE report day, but discounted the report at the end of the week (a USDA report is very good at humbling private market analysts). Yet, we must stick with the USDA objective estimate of 20.5 million bales for the U.S. crop until the release of the September estimate. If USDA still calls the crop at 20 million bales then, look for December futures prices to slip closer to 62-63 cents.
The world could use a big crop, but long range weather ideas continue to suggest a U.S. crop below 19 million bales. The important question as to actual U.S planted acreage still remains. Traditionally, USDA has given a well-defined acreage estimate by August. Yet, this year we may see a marked increase in the planted acreage estimate in next month’s report. If so, the case for a 20.5 million bale crop estimate becomes more realistic.
Too, USDA’s decision to raise world carryover drew considerable second guessing, as USDA seems to feel India is stockpiling cotton. Thus, the market seems to discount the world supply demand estimates as more and more cotton traders around the globe are questioning USDA’s carryover estimates – thus, increasing the market volatility.
As this is sorted out, look for December to hold within the prior 65-69 cent trading range. However, three weeks of excellent weather in the near term would pressure the 65 cent price support level.
Along with the 1.55 million bales increase in the size of the U.S. crop, USDA also increased its estimate of exports 700,000 bales, up to 14.2 million. U.S. domestic consumption for 2017-18 was lowered 50,000 bales, down to 3.35 million. The corresponding increase in carryover out to August 1, 2018, was increased from 5.3 to 5.8 million bales. Thus, USDA is estimating that U.S. carryover stocks will increase 3.0 million bales during the current season. It is this increase that will keep pressure on cotton prices.
World production was estimated to increase some 2.0 million bales, up to 117.31 million – mostly accounted for by an increase in the U.S. and a 500,000 bale increase in China. World consumption was increased 400,000 bales, up to 117.4 million. Consumption by China was estimated at 38.5 million bales – 500,000 bales higher – but Indian consumption was lowered 250,000, down to 24.5 million bales.
USDA appears to use its Indian statistics to balance its world data bank, as it alternatively raises and lowers that country’s production, exports, domestic use and/or carryover on a monthly basis, often backtracking in subsequent months. It was surprising that USDA did not change Australian production, expected to be lower, or Chinese carryover, also expected to be lower. The Chinese production increase was offset by an equal consumption increase.
World carryover was increased about 1.25 million bales, up to 90 million. Most expected world carryover to be lowered some 2-3 million bales, notwithstanding the 6-10 million bale overestimation most analysts claim exists in USDA estimates specifically related to India and China – the world’s two largest producers (note: USDA has responded by providing its methodology in a professional manner to some criticisms surrounding its cotton estimates). Currently, those two countries are expected to produce 53.5 million bales of the world’s expected 117 million. India, China and the U.S. are expected to produce 74 million bales.
This marks the second consecutive year that upland yields were estimated to average in excess of 1,000 pounds per acre in at least eight states. All Mid-South states, except Louisiana, were estimated above that mark. Georgia, with the second largest planted acreage behind Texas, was estimated to harvest 1,039 pounds per acre – the only state in the Southeast above 1,000 pounds. Certainly growers can be well pleased with the yields and choice of varieties that seed companies have made available. Upland yields were estimated to average 23 pounds more than in 2016.
It is still months away before the peak ginning season. It should be noted that the historical average deviation between the August estimate and the final harvest is some 1.8 million bales. Thus, many in the industry feel the August estimate will prove to be the highest of the season.
Basis December futures, prices will continue to trade the 65-69 cent level for at least another two weeks and likely into early September.
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