AUGUST 14, 2020

WEEK BRINGS BEARISH REPORTS AND DECLINING CROP CONDITIONS

• New Jobless Claims Less Than Expected
• USDA August Crop Production and WASDE Report Released
• Crop Conditions in Texas and Tennessee Decline

Friday kicked off the week with cotton futures giving back all of the prior week’s gains and more. Prices dipped a bit again on Tuesday, falling to the week’s low at 62.01 cents per pound. Prices did rally back almost to 64.00 cents before Wednesday’s WASDE gave the market a bearish shock (more details below) that sent the market back toward the lows. Prices recovered somewhat Thursday, finishing the week 186 points lower at 62.99 cents. Average daily trading volume improved this week, and open interest gained 3,543 to 190,218 contracts.

OUTSIDE MARKETS

Stocks continued to rally, despite no forthcoming agreement on the next round of aid. On the (somewhat) brighter side, new jobless claims and continuing unemployment were both significantly less than expected as measured by analysts surveyed. New jobless claims actually dipped below one million for the first time in months. Unfortunately, better-than-expected continuing claims still leave 15.486 million people out of work. Low levels of inflation are also leaving plenty of room for the Federal Reserve to keep new money flowing into the system, which has pressured the value of the dollar and increased investors’ interest in hedging against inflation with commodities.

WASDE AND CROP REPORT

On Wednesday the USDA released both the August Crop Production Report and the updated World Agricultural Supply and Demand Estimates, both of which held significant surprises. In a shock to analysts, none of whom reported expectations for a larger crop, the USDA published revised U.S. crop expectations at 18.08 million bales. Despite lower crop expectations for Texas, the upward revision was driven by moving yields from the 10-year averages (the previously stated assumption used by the USDA) up to trend yields that reflect state-wise condition ratings. At 508,000 bales higher than the highest published forecast, the figure caught traders off guard.

The WASDE report added to the bearishness of the crop report with cuts to consumption, although they were partially offset by higher exports for 2019/20. U.S. domestic use was cut 300,000 bales to 2.2 million for 2019/20 and by 100,000 to 2.7 million for 2020/21. Exports for 2019/20 were increased 200,000 bales to 15.4 million. The net impact was to increase estimated U.S. ending stocks on July 31 of 2021 to 7.6 million bales, up 800,000. World production for 2020/21 was revised up 1.28 to 117.53 million bales with increases in India and the U.S offset by decreases in West Africa and Greece. World consumption was decreased 1.24 to 113.05 million bales, mainly on decreases in China and India. In sum, World ending stocks were forecast at 104.91, up 2.14 million bales.

EXPORT SALES

This week’s export sales report was the first for the 2020/21 marketing year. Net new sales were just 6,900 bales, but carryover sales (unfulfilled sales carried over from 2019/20) totaled 2.88 million. The large carryover sales plus the sales for 2020/21 that were already on the books kick off the season with nearly half of the forecasted exports this marketing year already committed. Shipments also started strong with 278,600 Upland bales shipped in the first six days of the year, with 157,100 bales of that headed for China. At this point, many traders are trying to figure out whether and when the low pace of sales will catch up to the high level of commitments.

CROP PROGRESS AND WEATHER

Crop conditions slipped this week, especially in Texas and Tennessee where the percent of crop rated poor and very poor increased sharply. Dry weather is helping the South Texas harvest progress, but both heat and dryness are weighing on West Texas. There is a tropical storm in the Atlantic, and while there is little chance of it making landfall in the U.S., the season is not over. On August 6, the National Hurricane Center increased the probability to above-normal hurricane activity for this season to 85%. Needless to say, traders will be watching the Atlantic closely.

THE WEEK AHEAD

The U.S. and Chinese trade teams are set to discuss Phase One performance Saturday, which will be closely monitored by all. Otherwise, crop conditions and weather will remain focal points. Whether or not the Export Sales Report continues to get attention in the short-run will likely depend on what information or headlines follow the China-U.S. Phase One talks.

IN THE WEEK AHEAD:

• Friday at 2:30 p.m. Central – Commitments of Traders
• Monday at 3:00 p.m. Central – Crop Progress Report
• Thursday at 7:30 a.m. Central – Export Sales Report
• Thursday at 2:30 p.m. Central – Cotton-On-Call