USDA: Possible Danger Zone for Ending Stocks?
Cotton prices were able to challenge the 72-cent level on the week, but settled at 71.84, basis March futures. May futures settled the week at 73.01.
This week’s upside movement in March was not unexpected, as it marked first Notice Day for the March delivery period. Unfortunately, the May contract is showing signs of slipping to the 69-71 cent level.
Export numbers were little improved, as most expected sales during the government shutdown to climb well above one million bales. Yet, USDA confirmed this week that such sales were just short of one million bales.
Tariff resolution rumors spurred the market higher. However, there was no mention of cotton in any of the reports attributed to “sources involved in the negotiations.” More specifically, cotton has not even been mentioned by the Chinese in their rhetoric. All discussions and “news leaks” have been about soybeans, with the exception of a mention of corn. As one leading international analyst stated, “Cotton is the red-headed stepchild in these negotiations.”
Actually, Chinese purchases of U.S. soybeans during the current cooling off period have been unseasonably high, while cotton sales have not only been unseasonably low – but, in fact, have been negative. As has been stated on several occasions, the Chinese have been good buyers of Australian and very aggressive buyers of Brazilian types. In reality, they have been buyers of anything except U.S.
Many in the U.S. believe that once the countries have resolved their differences, the Chinese will return to their historical preference for U.S. cotton. Yet it is difficult to reason such, given the Chinese investment in developing the Brazilian cotton export infrastructure. Just as the U.S. must develop alternative markets for cotton, the Chinese must develop alternative sources for cotton purchases.
Heretofore, the U.S./Chinese business relationship was built on the reliability of U.S. merchants and cooperatives. Additionally, thanks to the U.S. seed companies, U.S. high grades were in abundance. However, Brazil is rapidly expanding its area of cotton production and, more importantly, has begun to improve planting seed quality.
USDA is forecasting 2019-20 U.S. ending stocks will jump by 2 million bales, pushing stock levels above 6.3 million bales – a dangerously high level. Of equal concern, if the U.S. fails to meet its current USDA export estimate – and few expect it to – then 2019-20 U.S. ending stocks will creep close to a market-killing 7 million bales. Therein is the analysts’ concern with respect to early pricing of the 2019 crop.
Yet, as befits the season, a lot of water must pass under the bridge before that scenario develops. The Mid-South is now experiencing flooding along all rivers, tributaries, creeks and streams, and the Southeast is approaching the same flooding problem. Of course, much of Texas still needs planting moisture. Heavy rain continues to fall. But more importantly, Midwestern states snow melt will not allow any relief.
Too, not only the cotton market, but the U.S. and world economics will receive a boost with the resolution of the trade dispute. However, the U.S. will keep its heels dug in on the trade issue until, for the first time ever, China agrees to an honest trade package. Not once has the Chinese government stood by its word since it was allowed to join the WTO – not once. Thus, the U.S. is expected to hold firm – very firm.
Give a gift of cotton today.