JUNE 15, 2018

COTTON FUTURES PLUNGE ON TARIFF ANNOUNCEMENT, WILL CHINA RETALIATE?

• Ahead of Tariff News, China Raises Import Quotas by Almost 3.7 Million Bales, But Who Will Benefit?
• Crop Conditions in Texas and Oklahoma Raise Questions About Southwest Abandonment
• U.S. Exports Up and Ending Stocks Down as Expected, World Data Has Surprises

Prices fell sharply at the end of the week, shrugging off bullish supply and demand figures and a decent export sales report. December futures, which have most of the market’s open interest, oscillated between 91.20 and 93.69 cents per pound until last night when the market fell to a low of 89.52. Overnight news that the Trump administration would move forward with tariffs against China has reminded traders that U.S. cotton was among the items indicated for retaliatory tariffs months ago. Total open interest declined more than 10,000 contracts from last week’s record high, leaving 309,292 contracts as of Thursday’s close. Only 39,425 open July futures contracts remain.

TEXAS AND OKLAHOMA CROP CONDITIONS CAUSE CONCERN

Monday’s crop progress report showed nationwide planting at 90 percent completed, with Texas, Oklahoma, and Kansas at 88, 82 and 91 percent, respectively. Squaring is already ahead of pace in many parts of the country at 15 percent versus the five-year average of 10 percent. Unfortunately, crop condition is severely lagging last year. As of last Sunday, only 42 percent of the U.S. crop was rated “Good” or “Excellent”, which is 24 percentage points less than last year. In addition, 21 percent of the crop was rated “Poor” or “Very Poor”, which is 5 percentage points more than last week and 16 percentage points more than last year. Unfortunately, Texas (31%) and Oklahoma (22%) make up the majority of the negative rating. The condition rating will keep traders closely scrutinizing Southwest abandonment potential.

MARKET MOSTLY IGNORES CHINA’S IMPORT QUOTA INCREASE

On Thursday, China’s National Development and Reform Commission (NDRC), which is the central planning agency, released an official announcement allowing for 800,000 metric tons (roughly 3.67 million bales) of additional cotton imports at a much lower tariff. While China’s futures market prices fell on the news, U.S. futures showed surprising indifference. However, China’s buyers have already booked a much larger volume of import cotton this year than last year, and the possibility of retaliatory tariffs makes the prospects for new sales very uncertain.

EXPORT SALES IMPROVE, SHIPMENTS IMPRESSIVE

U.S. export sales rebounded for the week ended June 7. July futures prices had dipped to 89.35 cents on June 6, and it seems that mills took advantage. Net new sales for 2017-18 were only 34,800 bales, but 2018-19 sales totaled 226,700 bales, mostly driven by 107,600 bales sold to China. Export shipments also were outstanding at 459,900 bales, the most ever for this week of the marketing year. Although sales were highly dependent on China, there is still apparently healthy demand below in a large number of other markets.

USDA SAYS WORLD CONSUMPTION WILL EXCEED PRODUCTION

The past few weeks’ phenomenal export shipments were all the justification that USDA needed to raise the U.S. 2017-18 export estimate to 16.0 million bales, an increase of 500,000, on the June WASDE report. As far as the U.S. goes, that was really the only change. U.S. beginning and ending stocks for 2018-19 were tighter as a result, but there were no other changes to U.S. production or use. By comparison, the 2018-19 world balance sheet was far more active. Crop projections in China, Australia and Pakistan decreased, resulting in a 730,000-bale net decline in world ending stocks to 83.02 million. World consumption is forecast to outpace production by nearly 5.0 million bales in 2018-19.

CHINA’S RESPONSE, WEST TEXAS WEATHER AND EXPORT SALES MAIN FOCUS

Traders are awaiting China’s response to U.S. tariffs, which will be critically important. Also, with planting deadlines passing and the Southern High Plains still very dry, weather could be a game-changer. There is rain in the forecast, but forecasts have been quick to change this season. Traders will watch eagerly for actual accumulation, particularly over the Southern High Plains. Besides weather, merchants will be carefully tending to any remaining on-call sales against July futures. Fixations must be finished by First Notice Day on June 25. As always, weekly export sales will be a key point of focus.

IN THE WEEK AHEAD:

• Crop Progress 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 will be released Thursday at 2:30 p.m. Central Time.
• The CFTC’s Commitments-of-Traders will be released Friday at 2:30 p.m. Central Time.