APC balesfour

A balancing act for the U.S. cotton market

Depending on the level of U.S. exports, the U.S. balance sheet might then be at risk of a historically large level of ending stocks. Such an outcome is generally associated with weaker prices.

As the new crop season begins to take shape, we have already reached some important milestones.

The National Cotton Council released itd early season snapshot of grower intentions to plant 13.1 million acres of all cotton. The NCC then projected a supply and demand balance sheet at their annual meeting, circa Feb. 10, that suggested a healthy supply could result from such levels of planting and production. 

Depending on the level of U.S. exports, the U.S. balance sheet might then be at risk of a historically large level of ending stocks (Table 1, Column 2). Such an outcome is generally associated with weaker prices.

Sources: http://www.cotton.org/econ/reports/annual-outlook.cfmhttps://www.usda.gov/oce/forum/2018/commodities/Cotton.pdf

The USDA Agricultural Outlook Forum (Feb. 23) was another anticipated milestone, and it offered a similar outlook for U.S. cotton (Table 1, Column 3). It is useful to compare and contrast these two outlooks.

BEARISH IMPLICATION 

First, they both have the same bearish implication for prices. If either is realized, I expect Dec’18 would have 10 cents to 15 cents of downside price risk.

The timing of such weakness, while always uncertain, could be reasonably expected to weigh in when the production risk premium fades from this market, often following USDA’s September Supply and Demand report (see below). If you consider that a reasonable possibility, what steps will you take now to deal with it?

A second aspect of the two forecasts in Table 1 is how they differ — mainly in their assumption about U.S. exports. Foreign demand for U.S. cotton will be the wild card. This list of uncertain influences includes Chinese reserve stock policy, foreign production, and economic growth. Yet, I am still struck by the fact that although the NCC and the USDA differ in their U.S. export forecast by 1.7 million bales, both outlooks still result in burdensome ending stocks. 

Bullish developments will doubtless unfold over the next year, but it will take an extra dose of them to change the market conclusion from Table 1.

IMPORTANT MILESTONES

Here are some more important milestones over the next few months. In March, the USDA will survey U.S. growers for their March 31 Prospective Plantings report. In May, the USDA will revise their forecasted balance sheet of U.S. cotton, along with their first comprehensive world cotton projections for 2018/19. 

Then on June 30, the USDA will release their Planted Acreage report.  The market will digest about six weeks of weather and crop condition information, during which time I would not be surprised to see at least one good weather rally. 

Finally, the USDA’s first production estimate based on field sampling (circa Friday, Aug. 10) will begin to pull back the curtain on the supply question. The USDA report in September can be influential in either confirming or contradicting what the USDA measured in the field in August.

For additional thoughts on these and other cotton marketing topics, please visit my weekly on-line newsletter at http://agrilife.org/cottonmarketing/.

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