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.cfm, https://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.