OCTOBER 12, 2018

MARKET ATTENTION FOCUSED ON WEATHER AND WASDE

• Several Changes Noted in October Estimates
• Traders Await Crop Damage Reports
• Macroeconomic Challenges Won’t Go Away
• Some Positive News in Latest Export Sales Report

This week’s trading opened with a bang as heavy rains pounded the Southwest cotton crop and Hurricane Michael took aim at the Southeast. Futures prices rallied to 77.61 cents per pound Monday, then touched the week’s high at 77.90 on Tuesday before giving back some of their gains. Despite the meteorological onslaught on open cotton, the rally stalled as traders awaited the release of the October Crop Production report and World Agricultural Supply and Demand Estimates (WASDE). Nevertheless, even after the WASDE release, Thursday’s activity remained trapped in the recent range as macroeconomic factors have kept caution high. Even so, open interest has begun to climb again, adding more than 6,000 contracts this week to reach 257,078.

U.S. PRODUCTION ESTIMATE RAISED

On Thursday, USDA released its October’s Crop Production report, which showed the U.S. crop growing by 81,000 bales. Before considering the key revisions, it is important to note that the estimates do not include Hurricane Michael’s potential impact or any possible losses from this week’s heavy rains in the Southwest. Without modification for those events, USDA lowered its estimates for the Southeast as Hurricane Florence-related losses in the Carolinas offset increases in Georgia and Alabama. Mid-South production was marginally lower as a decrease in Tennessee overwhelmed small gains in Missouri and Mississippi. Most notably, the Southwest production forecast was increased 180,000 bales, with Texas increasing 200,000 bales and Oklahoma decreasing 20,000.

U.S. EXPORTS LOWERED

In addition to the crop figures, USDA simultaneously released the October WASDE report.  Weak U.S. export sales for the past several weeks justified revising the U.S. export forecast down by 200,000 bales to 15.5 million. With a larger crop and lower exports, USDA now expects U.S. ending stocks to be 5.0 million bales, 300,000 higher than last month. However, with Hurricane Michael wreaking havoc on the Southeast, today’s production forecast is almost certainly wrong, at least for Florida and Georgia. Most traders will not place much weight on today’s U.S. figures, and many already have a bias toward smaller production in next month’s estimates.

WORLD STOCKS GETTING TIGHTER

Although the report signaled a looser U.S. balance sheet for now, there was a surprise tightening of world stocks. The most important change was based on historical revisions to India’s use and stocks, which lowered India’s beginning stocks by 2.9 million bales to 8.68 million. Along with a half-million-bale cut to Australian production, a 200,000-bale reduction in Turkey’s consumption, and other minor changes, world ending stocks decreased 3.01 million bales from last month’s estimate to 74.45 million. There are still 6.1 million bales more consumption than production on the world balance sheet for this season. The drop in stocks likely will bring the world’s cotton production deficit back into the spotlight.

NEGATIVE ECONOMIC FACTORS WEIGH ON MARKETS 

Although the world revisions were bullish, the market failed to sustain a rally after the report and even closed with a small loss in December. Unfortunately, one does not need to look far for a reasonable explanation. Higher interest rates, a strong dollar, and trade jitters already had traders on edge. This week’s stock market sell-off is keeping many investors and would-be speculative buyers taking money out of all risky assets including commodities. Speculative buying likely will be diminished until broader markets stabilize. On the brighter side, there are hints of positive news surfacing in other quarters. Some of the U.S. dollar’s competing currencies have stabilized, and there have been rumors that certain international conflicts soon will be resolved. After the week cotton has had, the market certainly could use the good news.

EXPORT SALES POSITIVE DESPITE CANCELLATIONS

This week’s Export Sales report showed demand firming slightly.  For the week ended October 4, exporters booked 183,000 bales of new sales with cancellations of 85,000 bales leaving net sales of 98,000 running bales.  Vietnam was the largest buyer with 65,000 bales followed by Turkey with 21,700 bales.  The report showed 142,900 bales sold for the next marketing year with 136,400 bales to China.  Shipments totaled 208,400 bales.

IN THE WEEK AHEAD:

• Crop Progress and Condition will be released Monday at 3:00 p.m. Central Time.
• The CFTC Cotton On-Call report will be released Thursday at 2:30 p.m. Central Time.
• The Export Sales report will be released Thursday at 7:30 a.m. Central Time.
• The CFTC’s Commitments-of-Traders will be released Friday at 2:30 p.m. Central Time.