For months the cotton market had been stubbornly bullish in spite of some analyst’s bearish fixation on the big crop scenario posed by the 2016 U.S. crop. All that shook loose with USDAΆs July supply demand report released this week despite the indication by USDA that the 2016 may be even larger than most analyst expect.

The primary changes made by USDA included a lowering of both beginning and ending stocks in China, an increase in Chinese demand, as well as the realization that it had underestimated U.S. cotton exports. This has been our major theme for some time so it was good to finally nail something given how dumb I am sometimes. As my best friends constantly remind me say, “a blind hog can find an acorn.”

USDAΆs adjustments created more bullishness than I anticipated given that USDA did not alter its data base for India. We have written numerous times of what we believe to be USDAΆs over estimation of the 11 million bale carryover it carries for India.

The bullish fundamentals we have written about in the past had their beginnings not only in China, but equally so, if not more so, in India. The industry has questioned the level of Indian stocks used by USDA for some 3 years. Finally, now that India is a net importer of cotton and the price for Indian cotton has risen to be one of the highest in the world outside of China, what can be the basis for defending an 11.4 million bale carryover in India?  Granted, USDA analysts are better than excellent at their task and I do/will support them at any juncture. Yet, the difference is a matter of market timing and the market is more about timing than anything else.

The new buzz word/phrase now seems to be optics. Thus, let me say that market action/reaction could come with more clarity if USDA adjustments were made quicker.  Yet, give them their due. They are the best. A lowering of Indian stocks is in order, a major adjustment in fact, but I sense the market is already trading a smaller stock level. Such a blessing by USDA would help us feel we were not sawing on the wrong side of the tree limb. However, we will continue to saw, even after we fall.

USDA estimated the 2016 world crop at 102.5 million bales with consumption at 111.60 million. Ending stocks on July 31, 2017 were estimated to fall to 91.3 million, or 9 million bales lower than ending stocks estimated for July 31, 2016, that is, lower than stocks of today. It was this –  a 9 million bales lowering of stocks that can be viewed as the one fundamental that powered prices higher.

Yet, because USDA did not elect to update its database for India, “ending stocks outside China” did not change appreciably. It is difficult for the cotton world to reconcile this given the significant change in the level of price. After all, cotton prices are up nearly 40% since the March 1 and the December contract low was established on the last day of February.  

A side note on the effectiveness of the market and its communication with growers:

• The market low, established the last day in February, occurred at the same time growers were making their final planting decisions. The market was suggesting to growers to not increase cotton seedings any more than current expectations, i.e., the heart of the time when the March plantings intentions data was being collected.
• The USDA report was generally very accurate. Actual plantings (June report) showed plantings some 4% higher, but nearly half of that additional seeding occurred in Texas which has a much longer planting window and extends the time frame to make planting decisions. Thus, the 4% miss becomes extremely minor in that context. The point:  USDA does an exemplary job in collecting and reporting cotton statistics.

USDA grew the U.S. crop size as well, expanding it from 14.8 to 15.8 million bales and putting that additional 1 million bales in the export category, increasing exports from 10.5 to 11.5 million bales (and still not reducing Indian carryover). This was a subjective estimate by USDA. The first objective estimate, a field survey will be part of the August crop report and supply demand report. U.S. carryover was still lowered 200,000 bales as USDA expanded its estimate of 2015-16 exports to 9.2 million bales. There remains a decent chance that number will climb to 9.3 million.

U.S. exports were light over the July 4 weekend as expected and sales occurred in the teeth of the price rally. Thus, both weekly sales and shipments were seasonably low, but should be stronger this week. U.S. cotton continues to draw healthy interest around the globe as the number of weekly customers continue in the 15-20 range during any normal week. There will likely be a rush the last 2 weeks in July to get cotton out as mills remain in short supply.

Mills are having to adjust their price targets as prices ran away from them and many are still only poorly covered. Additionally, the market strength continues to show depth as grower pricing and hedging has been massive (selling futures) and the rally absorbed all that was thrown its way.

The addition of mill price fixations (buying futures) into the arena will keep support under the market. However, what comes up must come down and cotton will likely see a retracement to the very low 70s, giving mills another opportunity at the 69-71 cent pricing level. Too, growers see that it is a far cry for a big crop just yet, especially given the current hot droughty conditions affecting much of the worldΆs crop. A new price range is with us. Look for the market to vibrate between 68 and 78 cents into harvest.

The annual Cotton Round Table will be hosted live next Friday, July 22 at the New York Stock Exchange. Speakers include Jarral Neeper, CALCOT; John Robinson, Texas A&M: Joe Nicosia, Allenberg/Dreyfus; Kip Butts, Informa and O.A. Cleveland, Mississippi State University. The program will begin at 8: 30 AM eastern time and can be heard live at www.agmarketnetwork.net   A recording will be continuously available at the same website about one half hour after the program ends.

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