SEPTEMBER 14, 2018

PRODUCTION ESTIMATE OUTWEIGHS STORM FEARS

• WASDE Report Surprises
• Export Sales Slow
• Currency Concerns Continue
• Storm Damage Awaited

Hurricane Florence’s potential damage drove December futures to a high of 83.93 cents per pound on Monday; however, prices settled back into the recent trading range as traders prepared for the release of key USDA reports. Wednesday’s crop production estimates did not include expected damage from Florence and showed a large enough increase in production to set the market back. Futures prices fell after the report and continued to fall to 81.35 cents, the week’s low, at the open of today’s trading. Nevertheless, traders’ positions seem to have changed little this week as volumes remained relatively low and open interest was relatively flat week-over-week.

USDA RAISES U.S. PRODUCTION

The September crop production report surprised analysts who, on average, had expected a slightly smaller crop. USDA’s 437,000-bale revision pushed the crop forecast to 19,682,000 bales. Every Delta and Southeastern state saw increased production estimates, with the exceptions of Florida (unchanged), Missouri (down 30,000 bales to 820,000) and Georgia (down 100,000 bales to 2,800,000). California and New Mexico Upland production forecasts decreased 10,000 bales each, while Texas production was unchanged through higher plantings and lower yields. Oklahoma’s acreage and yield both increased, lifting USDA’s production estimate to 950,000 bales (up 120,000). In Kansas, planted and harvested acres jumped 38 percent to 160,000, which more than offset a yield decrease. USDA now expects 335,000 bales from Kansas, 85,000 more than last month. Oklahoma and Kansas accounted for nearly half of nation’s increase.

CHINESE PRODUCTION UP, AUSTRALIA DOWN

In addition to the crop production report, the September World Agricultural Supply and Demand Estimates (WASDE) showed the U.S. crop figure’s impact on the U.S. and world balance sheets. U.S. ending stocks only increased 100,000 bales to 4.7 million as the production increase was offset with lower beginning stocks (-100,000 bales), higher exports (+200,000 bales), and a small increase in expected losses. World production also moved higher by 1.44 million bales on improved prospect for Chinese production as well as the United States’. Australia’s crop reduction offset an increase for Brazil. The world consumption forecast increased by 320,000 bales to 127.94 million, thanks to a 300,000-bale increase in India, which is now expected to use 25.5 million bales. World ending stocks increased 360,000 bales to 77.46 million.

SEASONALLY SLOW EXPORT SALES

U.S. export sales are experiencing normal seasonal slowness. Shippers had net new orders of 81,700 bales of Upland cotton for the 2018-19 marketing year and 17,700 bales for 2019-20. Shipments fulfilling existing orders totaled 135,700 bales. Foreign currency weakness and U.S. Dollar strength remain a major headwind for U.S. commodity exports. For example, Turkey, which is traditionally a large importer of U.S. cotton, has suffered currency devaluation of nearly 40 percent over the past four months, dramatically increasing the cost of imports and forcing Turkish mills to focus on domestic supplies. Most importing countries are not facing the same level of currency devaluation as Turkey, but the U.S. Dollar’s strength has affected the cost of imports for most foreign buyers.

IMPACT OF FLORENCE ON PRODUCTION

Uncertainty reigns, and clarifying information will come slowly. It will take weeks, if not months, to judge the true damage from Hurricane Florence. Analysts and traders expect a few hundred-thousand to perhaps half-a-million bales to be lost, depending on the extent of flooding and how rapidly fields can dry out. As they wait for damage estimates, traders will keep additional weather threats under watch and closely monitoring weekly changes on the crop progress and condition reports. Thankfully, Hurricane Isaac has been downgraded but that is no guarantee the system will not re-form in the Gulf of Mexico. On top of the weather uncertainty, traders must continue to monitor foreign-exchange volatility and international trade developments. Unfortunately, the timing and flow of information is as uncertain as its potential effect, and traders have little reason to change their positions.

IN THE WEEK AHEAD:

• Crop Progress and Condition will be released Monday at 3:00 p.m. Central Time.
• The Export Sales report will be released Thursday at 7:30 a.m. Central Time.
• The CFTC Cotton On-Call report to be released Thursday at 2:30 p.m. Central Time.
• The CFTC’s Commitments-of-Traders report will be released Friday at 2:30 p.m. Central Time.