December Futures Prices? Ask Mother Nature.
July 23, 2017 The 2017 Cotton Roundtable held last week with ICE in New York at the New York Stock Exchange focused on the size of the 2017 world crop, with emphasis on production prospects in India, the U.S., China and Pakistan. The demand side of the price equation was highlighted by the near-record volume of “next marketing year sales” by the U.S. and the immediate needs faced by world textile mills.
The speakers bracketed the current December 2017 futures contract between a low in the mid-50s to a high in the low 70s. Three of the speakers projected a price range between a low of 64 cents to a high of 72 cents. Another felt that the projected U.S., as well as the Indian and Pakistani crops, were such that New York could easily be pressured down to the mid-50s, basis the December contract. Another felt the range could vary between the very low 60s and mid-70s.
Yet, as has been discussed for more than a month, all agreed that Mother Nature holds the key to forthcoming price activity, as world demand – while improved over the 2016-17 marketing year – was well understood by the market.
India finally experienced very timely rains in the central region of the country. Heretofore, the already exceptional monsoon season in the northern region now projects throughout the country. USDA’s forecast for a 29 million bale crop is now very feasible.
The U.S. crop continues to improve, with the Southeastern and Mid-South crops showing the most improvement. The Rio Grande Valley and the Coastal Bend areas of Texas will likely exceed expectations. Harvesting is well under way in those areas, and growers have been pleasantly surprised with yields. The West Texas region continues as a mixed bag based on moisture conditions. The large high pressure system over West Texas discussed two weeks ago remains in place without any prospect of moving.
Speakers at the Roundtable had differing views of the projected crop size, but did agree that Texas was the wild card. They projected a range between 17.7 and 19.0 million bales. However, a crop of 19 million bales will require the high pressure to move out in the next three weeks. The early subsoil moisture bodes well for a big crop, but rains by mid-August will be necessary if it is to develop.
Likely, the USDA September crop report will be very telling if moisture has not been received by then. Given the projected abandonment, it is very unlikely the U.S. crop can exceed 19.0 million bales. However, without moisture in West Texas, the crop could still drop to 17.5 million bales. This is the basis for the continued reference to the importance of Mother Nature.
Forward sales of U.S. cotton into the next marketing year continue to approach record volume levels. Additionally, shipments for 2016-17 continue to exceed the projected pace forecast by USDA. This is only adding to the perceived tightness of stocks available for third quarter delivery and is raising concern regarding October and November fourth quarter delivery.
As has been stated, U. S. sales will slow when Indian sales begin to mature, but the industry is multiplying its concern regarding the severe overestimation of Indian stocks by USDA. Unlike in the U.S. and China, warehouse space in India is limited, and merchants report neither warehouses nor mills are carrying much volume. The cotton industry is voicing more concern as to where the stocks are, why India is importing cotton if it has stocks on hand, why traditional and very logical Indian export markets have significantly reduced purchases from India and a host of other questions if, in fact, India has over 12 million bales in inventory as reported by USDA. Many analysts now suggest that Indian stocks could be as much as 50% over-estimated.
The correct answer may not appear important to some. However, it is important from the position of market volatility, which would generate significant short term explosions in cotton prices. USDA has logically discussed the issue in terms of the time of year for which projections are based. However, time of year comparisons are not relevant with respect to whether the stocks exist or not. As such, there is increasing concern that the primary function of the market – price discovery – is being impacted by fictitious bales.
The market remains locked in a very narrow three cent trading range, while estimates of the world crop remain stable. The U.S. carryover of 2.9-3.0 million bales or less is earmarked for shipment in August and September. There will need to be some 2.5 million bales of the 2017 crop harvested in that time period if the U.S. is to meet its third quarter and early fourth quarter export requirements. This will keep a fire under the market into the early harvest period.
August should prove to be a turnaround month for cotton prices. Additionally, we have also mentioned several times that the 2017 cash basis going into the October-November period could prove very positive for growers. But don’t wait too long – gravy gets cold fast.
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