By O.A. Cleveland, Professor Emeritus, Mississippi State University
Cotton production around the world is increasing as is the stockpile of world supplies, so why are prices easing higher?
What gives? What are we missing?
In a nutshell, cotton, unlike grains and oilseeds, is not a homogenous product. The world supply estimates lump all cotton together. Yet, the market does not. The market divides the crop into various grades and qualities. It is the “quality” cotton that is driving the market. Thus, the divergence of market signals across the USDA estimates.
USDAΆs September world supply demand report filled in a few more blanks this week as its latest estimates continued to point to a shortage of high quality low contamination cotton, a very similar situation to that of the prior marketing year and one that is actually supportive of prices. The report gives us no reason to stray from the belief that the narrow 10 cents – 62 to 72 cents -trading range will change in the coming month. What the report does not measure, nor should it, is the effect, if any, Mother Nature will have on the market in the coming weeks. Likely the market will draw its direction from Her.
USDA lowered its estimate of U.S. production 1.0 million bales, dropping it to 16.5 million bales. Domestic consumption was unchanged, but exports were lowered 700,000 bales down to the 10.0 million bale current estimate. This estimate is felt to be far too low. The marketing year is only some 2 months old and export sales and shipments are already approaching 4.7 million bales, or nearly 47 percent of the estimate, with 10 more months left in the season.
Too, export sales to date are significantly ahead of the pace set in 2013-14. Crop size is a key in calculating exports, USDA suggests, but look for the export estimate to be increased 300,000 to 600,000 bales over time. U.S. carryover stocks were lowered to 5.2 million bales, down from last monthΆs 5.6 million. Again, look for carryover supplies to drop to about 4.7 million bases by August 1, 2015, possibly lower.
USDA increased its estimate of the world crop marginally, up 400,000 bales, up to 118 million bales. However, despite significant growth in consumption, world carryover was increased by a whopping 1.2 million bales, an extremely bearish sounding number.
Country production estimates for the top 5 producers were India, 30 million; China, 29.5 million; U.S., 16.5 million; Pakistan, 9.5 million and Brazil, 7.5 million. Look for Chinese production to increase some 1.5 to 2.0 million bales – allowing China to hold its reining title as the worldΆs largest producer for 1 more year.
While these are all interesting statistics and factual numbers with their respective meanings, the real statistics that the market read into the report were comprised of the following two events:
The exportable supplies of cotton outside of China continue to decline and ending stocks of machine harvested, low contamination, quality cotton in Australia, Brazil and the U.S. continue to decline.
USDA finally agreed its initial estimate of Chinese imports was too low and raised its estimate 520,000 bales Yes, there are very small pockets of exportable supplies outside the 3 countries mentioned. Yet it is those 3 countries that produce the vast supply of quality cotton available for export. Stocks in those countries are down 450,000 bales from last month and are now very comparable to just 11.75 million bales of a year ago.
This is no time for growers to begin pricing. A speculative short covering rally takes December to 70 cents where some pricing could occur.
Such a rally could easily extend to 72 cents. Additionally, the entire Cotton Belt is being hit with either or both very cool temperatures and rainy weather this weekend…either of which is not welcomed at this time of year. The U.S. crop needs warm open weather to mature the fruit that is on the plant. Mother Nature continues to hint that she will further reduce the size of this crop.
