OCTOBER 5, 2018

PRICE DECLINE CONTINUES, DEMAND REMAINS WEAK

• Crop Conditions Improve in Texas. Could it be Due to Shredding Abandoned Acres?
• China Cancels and Re-books Purchases from the U.S.
• The Negative Impact of the U.S. Economy on Export Sales
• Will It Rain Across the Southwest in the Coming Days?
• WASDE Coming. Will it Set the Tone for Next Month’s Outlook?

December futures prices dipped to a fresh low of 75.37 cents per pound Monday morning, then rallied to mark the week’s high at 77.20 cents at midday. Unfortunately, the rally disappeared as quickly as the dip, and futures settled Monday with a slight loss. Although volume was healthy Monday, trading activity subsided for the rest of the week, and prices failed to move outside Monday’s range for the rest of the week. Open interest jumped 4,579 contracts to 251,805, signaling more new buyers and sellers than traders exiting positions.

CROP CONDITIONS

Monday afternoon’s Crop Condition and Progress report showed unexpected improvements in the Atlantic States and the Southwest that more than offset declines in the Mid-South. Nationally, the share of the crop rated good or excellent increased three percentage points to 42 percent, while the share rated poor or very poor declined four percentage points to 25 percent. The share rated as fair increased one point to 33 percent. Texas’ good or excellent share increased five points to 28 percent, and the poor or very poor share fell 7 points to 38 percent. It is worth noting that the rating only applies to standing cotton, so the shredding of abandoned acres may reduce the share rated poor or very poor.

HARVEST PROGRESS

USDA also estimated 19 percent of this year’s crop had been harvested by Sept. 30. All but the Abilene, Lubbock and Lamesa classing offices have begun reporting steady volumes, with the season-to-date total at 1.3 million bales. So far, the predominant color grade and leaf is a 31-3, with average staple length of 35.9. Traders expect staple length to improve, but recent rains over the Mid-South and Southeast crops, including those affected by Hurricane Florence, have many expecting lower than usual color grades.

EXPORT SALES

Demand for U.S. cotton seemed to soften on this week’s Export Sales report. For the week ended Sept. 27, exporters booked new orders of 114,300 bales, but the total was reduced by 92,500 bales of cancellations. Net new sales totaled just 21,800 bales. However, on closer inspection, most of the cancellations consisted in 90,200 bales of Chinese orders that were re-booked for delivery in 2019-20 rather than 2018-19. Additionally, unshipped orders for this marketing year and the next combined are still at a record high for this time of year. Shipments were healthy at 179,700 bales.

U.S. ECONOMIC CONDITIONS

The U.S. economy continues to show signs of strength. The September Jobs report had fewer new jobs than expected, but upward revisions for July and August more than made up for it. As a result, the unemployment rate fell to 3.7 percent, a 49-year low. Average hourly wages have increased 2.8 percent year-over-year. Unfortunately, the strong economy has increased expectations for more rate hikes and a stronger U.S. dollar, which makes U.S. exports less competitive. August’s International Trade figures released Friday reflected the headwind. The U.S. imported $262.7 billion of goods (+0.6%) and exported $209.4 billion (-0.8%), for a trade deficit of $53.2 billion dollars (+6.4%).

RAIN FORECAST

There are fairly large rains forecast over swathes of West Texas, Oklahoma and Kansas in the next week, and with the quantity of open cotton in these territories, we are well beyond the point where heavy rains are welcome. It may be good for soil moisture, but there is significant risk to crop quality. Nevertheless, even with the weather, most traders’ attention will be fixed on the simultaneous release of the October Crop Production report and the World Agricultural Supply and Demand Estimates (WASDE), which likely will set the tone for the next month’s outlook.

In the week ahead:

• Crop Progress and Condition will be released Tuesday at 3:00 p.m. Central Time.
• At 11:00 a.m. Thursday, USDA will release the October Crop Production report and WASDE.
• The CFTC Cotton On-Call report to be released Thursday at 2:30 p.m. Central Time.
• The Export Sales report will be released Friday at 7:30 a.m. Central Time.
• The CFTC’s Commitments-of-Traders will be released Friday at 2:30 p.m. Central Time.