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USDA Report Shifts Numbers, Pressures Prices

USDA’s May supply demand report brought pressure to the cotton market and moved prices slightly lower, down to the very critical 60-61 cent support level.

I, for one, had thought the 61 cent level would hold based on prior mill buying. But the old crop July contract is fighting to hold that level, spending the last several days of the week near the 60.60 cent level. The 60-cent mark offers another line of support, but that failing opens up the December new crop contract to a test of the 57-cent mark.

Mother Nature’s beautiful smile could pressure the December contract down to 55 cents – a level I had previously thought was only in the rear view mirror.

Planting progress is on schedule, and planting conditions through the middle of May are generally ideal. There are scattered complaints of either too wet or too dry planting conditions and comments of cool night temperatures, but, again, it is still early in the season. Additionally, the dry conditions in parts of the Southwest relate only to surface moisture, as subsoil moisture is very adequate to carry the crop.

Until the crop is in, look for the trading range to be between 58 and 63 cents.

In its May report, USDA lowered its estimate of 2015-16 U.S. exports by 500,000 bales – a very significant reduction given that there are only four months remaining in the season. The basis of such a reduction was the traditional easing of shipments the last three months of the season. The model is not without merit, but the hand-to-mouth buying and immediate delivery demands of the past two years are likely to remain in play again this year. Failure to account for that change in mill sourcing patterns caused USDA to underestimate exports the prior two years.

If the current two-year pattern is the new norm, then U.S. exports could range between 9.35 and 9.75 million bales – markedly higher than the new USDA estimate. Additionally, USDA’s farm price prediction suggests that exports will be higher than the new estimate. The reduction in exports was moved to carryover stocks, exploding July 31, 2016 carryover to 4.0 million bales.

World production was estimated at 99.5 million bales, finally reflecting the reduction in the Indian crop that should have been made several months ago. World consumption was increased marginally to 109 million bales. World carryover was lowered to 102 million bales, reflecting a 10 million bale drop during the current 2015-16 season.

The May supply demand report is traditionally USDA’s first release of prospects for the upcoming marketing year. The report suggested that 2016 U.S. production would swell to 14.8 million bales, some 1.9 million bales above the current season’s crop. Plantings were estimated at 9.6 million acres. Mill use was projected to remain stable at 3.6 million bales, and new crop exports were projected to climb to 10.5 million bales.

The average farm price outlook carried a rather large 20-cent range, from a low of 47 cents to a high of 67 cents. In very general terms, this implies a futures price range from 52 cents to 72 cents – again, a very wide range.

Ending U.S. stocks for July 31, 2017 were estimated at 4.7 million bales, implying a stock-to-use ratio of about 33%.

The world 2016/17 cotton projections show consumption slightly more than six million bales above production, with stocks declining a like amount. This will be the second consecutive year for consumption to exceed production. Production was estimated at 104.4 million bales and consumption at 110.8 million. This represents a 5% increase in production despite a lower planted area.

Production is set to increase in the U.S., Turkey, Pakistan and India. Chinese production is forecast to decline 1.3 million bales. The increase in consumption is just short of 2% and reflects cotton’s deepening battle with man-made chemical fibers. However, ending stocks were projected at 96.5 million bales – down from the current year’s 102.8 million.

The major change in carryover stocks is the ongoing reduction in Chinese stocks. Effectively, the entire world stock reduction will occur in China, where beginning stocks were estimated at 63.3 million bales and year-ending stocks were forecast at 56.7 million. Nevertheless, Chinese stocks will still be nearly a two-year supply and imply it will take five to seven more years to work off the excessive Chinese inventory. Yet, a one-year production disaster could reduce that time period in half.

Reflecting lower prices of the prior week, weekly export sales climbed above 100,000 bales as upland sales were a net 103,500 RB, with Pima sales at 5,200 RB. Brazil continues in the market, a reflection of crop problems. The shipments, should they continue at such levels, will far surpass the new USDA export projection.

Regarding China and sales from the reserve program…true to their word, Chinese sales have mostly been the imported high grades, and offered cotton has essentially sold out every day. Look for the volume offered to increase and for the percentage of domestic low grades to increase. Mills will continue to buy the domestic low grades as long as they can access the imported high grades. Additionally, mills still have import certificates that will help support the market for domestic low quality cotton sales from the reserve. The program has added stability to the market, and there is no reason for this to change.

The USDA report has to be taken as bearish even as world stocks decline. The fact that U.S. stocks are projected to increase sharply implies that importers will have an excellent array of cottons from which they can select during the coming season. Quality will continue as the market’s mainstay.

In that regard, the market could get a boost from Indian production. India and Monsanto have agreed to disagree, and no new seed will be available in India this year. The country does not view this as a problem, but seed technologists are suggesting that Indian yields will suffer.

The 55 cent number is in play again, regardless of whether I saw it coming or not. Yet, with slightly improving demand, a 63-64 cent market cannot be discounted.

Give a gift of cotton today.

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