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USDA Spins Market with Record Supply-to-Use Ratio

This is a tough one.

While losing some 700 points from the hurricane-driven high, December futures are still hovering near 69 cents and attempting to dig in its heels. Its efforts will prove fruitless, I predict. The real work will have to be done once the market tests its long term price support at 65 cents. Further down is the excellent support at 62 cents.

How dare I speak of prices in the low 60’s? Okay, let talk about the high 50’s then. As I said, this is a tough one. My expected trading range is now a very wide, nine-cent 62-71 cents, with a downward bias.

The September world supply demand numbers confirmed that the hurricane difficulties, disastrous as they were for some, were but a mere hiccup for the world crop, much less even for the U.S. crop. As we had foretold, world cotton production progress made giant leaps and strides during August, as Mother Nature called all the right shots and at all the right times. Granted, much of the northern hemisphere crop is late and bagging and ties are still in storage, but the fruit is on the plant.

The question again returns as to whether Mother Nature will mature the plant and allow for its harvest. The long range weather forecast is not promising, but the crop is on the plant today.

The USDA world supply demand report left the market spinning as it forecast the highest world supply-to-use ratio ever – that’s ever in the history of cotton record keeping, a very bearish prognostication.

According to USDA, the Indian crop is bursting at the seams, 1.0 million bales over last month and now forecast at 30.0 million bales. The U.S. crop is looking at record yields, up 1.25 million bales from last month and now forecast at 21.76 million bales. The Australian crop was estimated at 5.0 million (up 200,000 bales), while the Brazilian crop has jumped 500,000 bales to 7.5 million. Even the expected supposedly troubled Chinese crop, at 24.5 million, is no longer troubled.

In total, USDA increased its forecast of world production about 3.5 million bales – up to 120.75 million. Total world consumption was estimated at 117.75 million, up 350,000 bales over last month. The primary increases were in Vietnam and Turkey.

USDA forecast the U.S. crop at a very unexpected 21.76 million bales – much larger than expected and up nearly 1.25 million bales from the August report. But USDA did make one major data adjustment. It corrected its planted acreage calculation from last month. That correction increased plantings some 500,000 acres. That alone accounted for about 750,000 bales of the overall production increase.

Additionally, and likely more importantly, the Department elected to wait another month before evaluating the effects of hurricanes Harvey and Irma. Thus, one should expect to see a major reduction in U.S. production in the October report. The impact of the two hurricanes will likely be near 1.5 million bales.

Two factors will come into focus. First, the harvested cotton that was destroyed by wind and water, as well as the land area that has been or will be abandoned due to flooding and its effect on standing plants. The other production loss will arise from wind damage that caused lodging in the fields (blowing down) and the twisting and tangling of standing plants still in the growing stage. These impacts will cause the loss of harvestable fruit, knocking off some fruit, as well as adding to boll rot that was enhanced by the cool, wet weather that followed the hurricanes. Thus, I am using a production estimate of between 19.75 and 20.0 million bales.

USDA accounted for the increased U.S. crop by increasing exports and adding to carryover stocks. An increase in exports implies a lower New York ICE price. USDA increased U.S. exports to 14.9 million bales, up 700,000, and added 200,000 bales to carryover, increasing it to 6.0 million bales. Some 50,000 bales were accounted for via a reduction in beginning stocks, and another 260,000 bales were incorporated as unaccounted loss.

October option trading expired at week’s end and gave a boost to the October December spread, pushing it out to 106 points, basis futures. The lack of certificated stocks, coupled with the limited availability of new crop high quality, will likely cause that spread to widen. Too, as high quality becomes more difficult to obtain, the quality premiums will increase, and the propensity for the futures contract to decline will increase. The basis level for high quality should remain strong through harvest. Although as the ICE contract trades base SLM 1-1/16, the December contract will have to defend its price support level of 65 cents and possibly 62 cents. Look for the price low to be as late as January – or until the Texas crop is well defined.

However, added to this mix is the record mill on-call sales level that continues to build. That is, mills have – and still are – taking short futures positions in the market at a record level. While I remain a bit of bear into January, this level of mill bearishness cannot be maintained, and their day of reckoning will come. Thus, it is difficult to think the market will fall into the high 50’s and that, in fact, the 62-65 cent price support will hold.

Give a gift of cotton today.

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