Market Mildly Bullish Following USDA Supply & Production Reports
September 16, 2013 Today’s thoughts have not been able to escape the legendary Shakespeare, as the cotton market’s initial reaction to the September supply/demand report seemed to be “much ado about nothing.” The immediate reaction to last Thursday’s report was mildly positive, while Friday’s trading action saw the market dip ever so slightly.
Nevertheless, the weekly trading – limited as it was – was mildly bullish all week. The market was supported by neutral weather activity around the globe, slightly bullish Chinese textile exports, and mildly positive U.S. retail sales. Yet, the primary support came from U.S. export sales and the ever-declining stocks of dependable supplies held outside of China.
The 81-to-82 cent support has become stronger as its foundation has built more and more traction. Additionally, the market trades very comfortably about its 85-cent axis. I do not look for much to change going into the November delivery period. Granted, cert stocks are very low and that could create a few fireworks for the October delivery coming in a few days. But the December contract should return to its current trading rhythm should the October contract get antsy.
USDA reduced its estimate of the U.S. crop, dropping it to 12.9 million bales, down 100,000 bales from the August estimate. However, exports were lowered 200,000 bales, down to 13.9 million bales, but that still remains one million bales more than the expected 2013 crop. Thus, U.S. carryover for 2013-14 was lowered to 2.9 million bales.
It is this little number – a 2.9 million bale carryover – that becomes much more than “much ado about nothing.” It is in a foretelling of a continuation of very tight supplies available to the world export market, and that the supply tightness of quality cotton will get even tighter.
Yet, the market veered away from the government estimate and began to dance to its own tune as USDA raised its ever increasing level of world carryover stocks another million bales, and prices moved higher. To paraphrase the late great U.S. Senator Everett Dirksen, “A million here and a million there, pretty soon we will be talking about real cotton.” That is, in the face of wildish, bearish USDA numbers, the market moved up, albeit only marginally higher. But it was higher.
The debate in the market is whether USDA has done its usual excellent job of estimating world stocks. Many feel USDA has overestimated Indian stocks by some 2.0 to 4.0 million bales, pointing to the unusually high in-country prices for Indian cotton. Most were looking for a reduction in Indian stocks this month, but USDA added another 1.0 million bales to the Indian carryover. Granted, cotton politics in India makes U.S. cotton politics look timid, but more and more indications point to a massive overestimation of Indian cotton stocks.
We will mark time with USDA on that issue, but another surprise coming from the report was the decision not to change the Pakistani or the Chinese numbers. The combined estimate of stocks from these two countries is felt to be some 2.0 to 3.0 million bales too high. Nevertheless, the market will not likely demonstrate a strong reaction to a correction to those carryover stocks. It has already melted a lower carryover stocks level into its pricing activity – that is, the perception of lower stocks has become a reality.
The full reports are available for viewing:
USDA World Supply/Demand Report
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