CottonΆs happy times continue to roll as the market blessed USDAΆs June supply demand report with consecutive strong bullish days, taking the old crop July back above 90 cents and the new crop December contract to within a kiss of its life of contract high and the 90 cent mark.
While most in the industry “feltΆ like the USDA June numbers were correct, the market was not buying into the bullish scenario until USDA actually spit forth the information.
Thus, when USDA did reveal its new assessment the market bulls came roaring out the chute and could not be held back.
USDA finally bit the bullet and recognized the strong demand that has been coming out of China for nearly nine months as well as the growing demand around the globe, even raising the domestic consumption in the U.S. In doing so USDA had to reduce total world stocks, world stocks-less China, as well as domestic carryover in the U.S.
These changes represented somewhat of a change in USDAΆs approach as we and others have suggested such changes week-end and week-out since December-January, or for the past six months. I am very strongly of the opinion that USDA continues to struggle with its data base for India in that Indian carryover stocks remain over estimated by as much as 1-3 million bales.
Some even claim that Indian stocks are 5 million bales lower than the USDA estimate, but more likely the overstatement is closer to 2 million bales. Tied in with the Indian situation was the fact that USDA reduced consumption in Bangladesh 100,000 bales, very odd in that Bangladesh has been one of the primary countries that has increased its consumption, beginning as far back as October 2012. Nevertheless, the June estimates are more consistent with market expectations/activity and the fact that the international price of cotton has risen above 95 cents.
Principal adjustments in the report included an increase of Chinese imports to 20 million bales, up 1.75 million over last month. U.S. exports were raised to 13.6 million bales, a 350,000 bales increase, a most unusual increase given there is only one more month left in the export year, but another example of USDA “catching up.” Such an increase at the end of the marketing year (July 31) suggests just how much difficulty USDA is having with balancing its Indian supply demand situation.
Also noted were major export increases from Central Asia, Australia, Africa and India; again, late in the year for such significant changes, but necessary for USDA to correct it balance for China. As has been discussed the late changes were necessary to catch up with actual demand plus the unusual trade activity due to the stockpiling of stocks from around the world by China. USDA also decreased carryover stocks outside of China to 35 million bales, down from the January estimate of 41 million bales.
With respect to new crop, U.S. production was reduced 500,000 bales reflecting the drought and other weather concerns. Production is now estimated at 13.5 million bales. The result was a reduction in world stocks for both the 2012-13 and the 2013-14 marketing years.
Additionally, the price rally brought managed funds back to the cotton pit and was a major contribution to the price rally. While some very good analysts are looking for December to eventually trade to 95 cents and higher, I continue to voice concern that mills have stayed away from cotton at the 90 cent level. A few months ago I was the only person thinking 90 cents plus was a possibility. Today, I am one of the very few that thinks the low 90Άs is all the gas this market has in it.
The grower in me hopes I am incorrect, but demand has just suffered every time the market has jumped over 90 cents. Yet, USDA reduced the U.S. crop only 500,000 bales, correctly implying that should West Texas still get some timely rains then the U. S. crop will not suffer as much as many feel. Too, this weekend represents the best opportunity for moisture the region has had in several months. I am forced to do some pricing above 89 cents.
The next pricing points are at 92-95 cents and then I would hold off until the market reached … well, I am not going to print that magic word, but unless there is another major disaster then that magic word will not surface in the market. Nevertheless, in the absence of very favorable growing conditions the market will continue to work the 85-92 cent level for some time to come.
