Many thought USDA’s August estimate of the U.S. crop might be a scene from a “wild, wild, west shoot- ‘em-up,” but everyone was bowled over, nonetheless. So much for the market not pushing above 93 cents until the September supply demand report!
USDA’s August estimate was what I had expected the September report to look like. Kudos to USDA for biting the bullet. The near 600,000-bale monthly reduction in the U.S. crop estimate sent the market on a triple digit daily shopping spree. Prices barreled through longtime price resistance at 93 cents and did not slow until getting within 30 points of 95 cents.
The next price objective is 97-98 cents, followed by the psychological dollar level, and then the 108-110 cent range. The report was so bullish that prices sailed above longtime price resistance and took prices into the upper 2% of the historical level.
This is a demand driven market. Make no mistake about that. Spinning mills can produce enough yarn, and apparel mills can’t find enough product. Retailers complain every day that they can get product. Both U.S. and world stocks are declining as we have long proclaimed they world. Too, the battle for acreage between alternative crops is at feverish pitch, and consumers continue to bid up the demand for resources.
Dollar cotton has a seat at the table. However, the territory above 95 cents has historically caused mills to reduce cotton’s share of the spinning mixes and more of manmade synthetic petroleum-based fibers.
The principal adjustment in the August report was the 540,000-bale reduction in U.S production, down to 17.26 million bales from last month’s estimate of 17.8 million. As a smaller crop would suggest, exports were lowered 200,000 bales, down to 15.0 million. Year ending stocks were lowered 300,000 bales, down to 3.0 million – not quite, but close to akin to “running out.” This change principally flowed through the world supply estimates along with a 750,000-bale reduction in the increasingly important Brazilian crop.
Brazil has become the single major competitor to the U.S. in the world export market. USDA did not reduce Brazilian exports, ostensibly because Brazil has very little warehouse space outside of mill storage and must export much of its crop upon harvest. Thus, they cannot hold crop in storage and manage price risk after harvest as the U.S. often does. However, they do produce a high premium crop, and, in most years, that is to their advantage. Yet in years such as this, they tend to have to reduce their asking price somewhat, even during such a shortage.
Other production changes of note were Australia (+500,000 bales); Central Asia (-150,000 bales); and the Franc Zone (+290,000 bales). World production totaled a net reduction of 530,000 bales, down to 118.84 million bales. Other production reduction is expected for China, India, and Pakistan.
USDA made few changes on the demand side of the price equation. World demand was increased only 170,000 bales, up to 123.33 million bales. Pakistan and Bangladesh estimates were both raised 100,000 bales each, along with minor reductions in Mexico and Central Asia. Current thoughts are that consumption will later be increased for Turkey and Pakistan.
The report reaffirmed the industry’s suggestion that demand was exceptionally strong. This was also supported by an exceptionally strong weekly U.S. export sales report that showed strong weekly sales of upland (342,700 bales) and Pima (10,200 bales). China (123,800 bales) was the leading buyer of upland, followed by Turkey (72,500 bales), Pakistan (40,000 bales), Bangladesh (39,600 bales), Vietnam (32,500 bales), Mexico (18,600 bales), and Korea (10,600 bales).
The very bullish response to the USDA report may suggest to some that the rally has run its course. Let’s hope not, for cotton producers’ sake. I would suggest the market has more very bullish days in front of it. However, in the back of my mind, I am cautious about cotton pricing itself out of the market. Too much of a good thing can be dangerous to demand.
Yet, back to the mill on-call sales (buying of futures) versus on-call purchases (selling of futures) I write about. The data indicated the need to buy futures dwarfs the need to sell futures. This technical tidbit has been supportive of prices over the past 3-to-4 months and is now set up to be wildly bullish over the next three months. Let’s see.
Another positive note buried in the USDA report is a line that states USDA estimates the price to the farmer to be 5 cents higher than it thought just last month. Historically, USDA has guarded against such a large increase. Doing so suggests they are believers.
The bull charges! It is past time to price some cotton. Do it.
Give a gift of cotton today.
Dr. O.A. Cleveland is professor emeritus, Agricultural Economics at Mississippi State University.
Πηγή: Cotton Grower
