Talking Curveballs, Credibility and Carryovers
Not since Van Lingle Mungo threw his last pitch for the Brooklyn Dodgers had the cotton market seen a curve as sharp as that thrown by the Foreign Agricultural Service (FAS), USDA in the February WASDE report. As cotton sales and shipments zoomed higher, USDA lowered its already industry-lagging export estimate from 14.8 to 14.5 million bales.
For their reputation, I hope they are correct and I am wrong. For the U.S. cotton grower, I do hope they are incorrect. I am already very familiar with crow.
USDA’s decision to decrease its forecast of U.S. exports, and increase its forecast of ending stocks for the world and the U.S. caught the industry off guard and generated a tweet by one of the industry’s principal analysts that read, “USDA WASDE out of touch with the reality of current cotton market.” The further comment was that it was sad to see such a historical esteemed group lose its credibility.
I repeat his tweet, as I agree with him.
It may yet be USDA that serves us the plate of crow. In their defense, we all know WASDE estimates are as of specific dates and are without speculation or conjecture unless specifically stated. We, on the other hand, have considerable conjecture in our estimates. Yet, we do reserve the right to challenge their predictive models and their use of FAS guesstimates in the place of official estimates, as well as their penchant to “make” the forecast match “the answer in the back of the book.”
Look for world and U.S. exports to increase as both U.S. and world carryover decrease. Old crop prices will trade between 75 cents and the low 80s, as the new crop December works the 75 cent area with an improbable shot at 80 cents. I would be 80% sold on new crop were it to tag 77 cents. Despite talk of a drought in the Southwest, there is still talk of 14 million acres planted if the drought becomes severe – insurance acres.
Mills are hoping to see the March/May/July trade down to 74 cents before resuming fixations. In this highly volatile market (41 million bales: one third of this year’s production was traded on futures last week), prices could fall that low, but the tightening availability of tenderable cotton makes it unlikely. There were strong and very active fixations all week as the March contract approaches first notice day. March fixations and some Mays will continue next week.
Yet, the ratio of on-call sales to on-call purchases facing the May and July contracts is 14.5 to 1. Unconfirmed estimates of unfixed grower cotton stands at only 15% of the 2017 crop. Thus, grower hedging pressure (selling of futures for grower needs) is not likely to be sufficient to offset the high volume of buying that will be required to offset the on-call sales.
My mill friends may prove to be correct, and a retraction down to 74 cents is possible, but not favored by statistics.
Weekly export sales rose to a net of 410,100 RB, 407,400 of upland and 7,700 of Pima. Another 118,500 RB of upland were sold for the 2018-19 market season. Thus, total sales on the week exceeded 525,000 RB. Just as remarkable was that some 22 countries were buyers of U.S. cotton. Shipments totaled 453,300 RB. Two more weeks of similar activity, and the export train would be back on track.
Interestingly enough, the blistering regeneration of the U.S. economy driven by Washington’s economic focus may work to solve USDA’s export dilemma. Trucking capacity is severely challenged and, in the intermediate run, may limit movement of cotton from the warehouse to the port. That is a new problem facing the cotton industry and agriculture as well and has yet to be resolved. However, initial indications are that this week’s sales and shipments are on track to meet those of the past week.
In the USDA February estimates, world production and carryover were increased, along with a bearish decline in world consumption. World production was estimated at 121.4 million bales, consumption at 120.5 million, and world ending carryover at 88.6 million.
In a true high wire act, USDA chose to decrease both Indian consumption and carryover, which is a contradiction of their belief that India is holding near-record stocks. Of course, the various Indian cotton associations, merchants, government bodies and analysts alike feel FAS/USDA has grossly overestimated Indian stocks. Most feel the New York ICE is trading an Indian stocks estimate of 6-8 million bales, compared to USDA’s bloated estimate of 12.6 million. The point estimate is 6.7 million bale Indian carryover at the end of the U.S. marketing year – about 6 million less than the USDA published forecast. USDA directly inflates its guesstimate based on its consumption estimate.
A bit of positive news comes as the age of cheap, polluting polyester is showing signs of coming to an end. Prices have escalated as production has declined due to manufacturing closures forced by the Chinese government as plants have not met minimum pollution standards. Too, the Chinese have determined the harmful effects of manufacturing polyester from recycled plastic bottles, and that industry is near shuttered. Increased cotton usage, at the expense of polyester, is creeping higher.
Cotton usage is increasing, and demand will hold the market and require acreage.
Give a gift of cotton today.