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Bears Take a Small Bite Out of the Market, But Not Demand

Bears Take a Small Bite Out of the Market, But Not Demand

Hold on. Wait a minute. The expected bullish supply demand report had bear tracks all over it.

New crop was bigger than expected, old crop exports failed to materialize, and U.S. carryover was increased. The bulls could point to only increased U.S. exports, smaller world ending carryover and a world consumption forecast at a record level. In response to the report, the market sank, as prices fell some 200 points to near 85 cents.

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However, demand remains strong, and it will take more than a larger than expected crop to break the back of prices. The trading range – 82-90 cents – held and likely will continue to hold into at least the September-October period. Yet, the action could have been much worse. The market held above 85 cents. Traditionally, a report as bearish as this one could have been expected to move the market down the 400 point daily, or about 83 cents.

The big news, just like last year, was that the seed companies have truly provided growers with seed characteristics never seen before. The new genetics provide growers with the potential for record yields.   The new varieties used across the Belt have brought increased yields, gin turnout and color/grade characteristics.  USDA estimated Texas abandonment at 3 million acres, and the Oklahoma and Kansas were drought-stricken as well. Yet, U.S. production was estimated at 19.25 million bales, some 750,000 bales greater than the July estimate.

The August report, the first objective yield survey of the year, provides the market with only a peep into the future of crop size. Remember, it simply measures potential crop size, not expected crop size. Based on the field survey, the Mid-South was projected to have record yields, as was the case for the Pima and upland grown in the West. Despite problems in the Southwest, the U.S. could still enjoy record yields. Thus, seed technology appears as a bright light for all growers.

USDA increased the level of beginning stocks from 4.0 to 4.4 million bales as a result of 2018-19 exports being lowered to 15.85 million bales from the earlier estimated 16.2 million. I had expected exports to reach 16.3 million bales, down from my earlier estimate of 16.6 million. However, the data suggests that exports will climb to 16.0 million. USDA did increase its estimate of 2018-19 exports by 500,000 bales, as the larger crop size make more cotton available for export. Thus, 2018-19 ending stocks (July 31, 2019) were increased 600,000 bales up to 4.6 million. As the year treks on, prices will come under pressure if this carryover level holds.

World production, consumption and carryover were marginally adjusted, with production up from 120.1 to 120.5 million bales. World consumption was increased from 127 million bales to 127.6 million. World ending carryover (as of July 31, 2019, a year from now) was projected at 77.1 million bales – down from 84.5 in the last marketing year.

Year-on-year Chinese carryover was forecast to fall 9 million bales, down to 28.6 million bales – a clear signal that the Chinese government’s policy of reducing strategic reserve stocks has been followed. USDA did not make any expected adjustments to its Indian spreadsheet, save for a minuscule 200,000 bale drop in beginning stocks as of August 1, 2018.

Despite the overwhelmingly bearish report, the supply of cotton held by foreign importers continues to fall. While mills are not chasing the market, preferring to sit back and “hope,” the report likely gave them the opportunity to price additional cotton. The northern hemisphere crop still has numerous hurdles in front of it. Growers will have the opportunity at pricing in the 86-88 plus cent range. Export sales for the new marketing year have been occurring at a record pace.

Note: USDA did, in fact, prove to be more attuned to the U.S. export situation that I had previously suggested. Give them their due.

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