The USDA rained on the Bull’s parade this week with much more bearish than expected cotton balance sheets being put forth in the Aug WASDE report. The Dec contract gave up 237 points on the week while Mar lost an even 200, weakening the inversion to 20 points. Let us be the first to say that, with respect to forerunning the USDA’s assessment, we projected US production far too low.
The USDA has pegged US production at nearly 20.5M bales, for now.
OK. That’s a lot, especially given that increased acreage and later than average planting dates are highly correlated with lower yields, not higher ones.
The bright spot in the report was yet another enhancement to the aggregate world consumption projection to 17.4M bales – and we think that more enhancements are in store. Given such, it seems unlikely that the USDA will carry out 5.8M bales on July 31, 2017, especially if aggregate quality of this year’s crop is on par with recent years. After all, 2016/17 ending stocks were, for the longest time, projected at much higher levels than their ultimately realized 2.8M bales – a bullish figure.
And the USDA has reason to think that demand is improving. Total net sales against 2017/18 for the week ending Aug 3 were approximately 76K RBs; shipments were nearly 120K RBs, and the US is already 44% committed against the USDA’s revised export target for 2017/18. Further, it should be noted that the 2017/18 marketing year was credited with only three days of the most recent sales period. Hence, new sales were, via extrapolation, better than they appeared on the surface of this latest report.
The USDA has projected an average national yield of 892 lb/acre (compared to 867 lb/acre last year) on 11.05 million harvested acres. Is this year’s crop truly exhibiting record levels? As we have stated in earlier reports, the US has the “potential” for a better than average cotton crop but will need near perfect weather conditions from now through harvest in order to reach the USDA’s projection. History tells us that there will be a variance in yield between the August projections and the actual numbers, and we think such variance will be greater to the downside this year due to the amount of acreage sown during the last 1/3 of the optimal planting window(s) and the low projected abandonment rate (8%) nationwide. The lower abandonment figure leads to more dryland and marginal acres being harvested where bigger yields are not typical, therefore bringing down averages. With the later crop across the US, the crop will also be much more susceptible to an early fall and the ever-present chance of a wet harvest season.
The National Hurricane center, just this week, increased the likelihood of extreme weather events over the near- to medium-term along US coastlines.
Producers could be forgiven if they considered an unkind thought about the USDA following Thursday’s report and subsequent limit down futures price movement. They can take a small comfort in knowing that the consensus among merchants and brokers was that the report should be taken with a grain of salt. That said, the USDA’s numbers are still the USDA’s numbers, and those are the numbers the market will trade until we have a weather event, an economic event, or a new report.
Friday’s trading sent mixed signals. The “rally” in the Dec to 69.15 seemed to signal the potential for a return to the low 70s in the next few sessions, but a close 90 pts below the high looks like either confirmation of a new trading range in the mid-high 60s or weakness in Friday’s recovery.
Producers with un-priced cotton are essentially stuck in the summer doldrums for the next few weeks. It will take a few more sessions for the market to fully respond to the WASDE and signal its bias as we approach harvest. It should go without saying that any return to the low 70s should be met with price fixations or put options, but temper your aggressiveness with a realistic analysis of your crop’s maturity.
There is a consensus among commentators, brokers and merchants that the spot basis will be strong for the first few weeks of harvest. The pipeline will need to be filled, and early cotton will benefit from last season’s shortfall and merchant sales already on the books. Cotton coming in later in the season faces a far less certain premium, and it would behoove late planting producers to take advantage of every opportunity the market offers in the next 4-6 weeks.
For next week, the standard weekly technical analysis for and money flow into the Dec contract remain bearish. Continued precipitation across The Belt will likely be taken as somewhat bearish for our market. It seems like a test, at least of the 65.00 – 66.00 level, basis Dec, is in store over the near- to medium-term.
Have a great weekend!