FEBRUARY 22, 2019

MARKET ON A ROLLER COASTER RIDE

• Encouraging Trade Talks Provide a Boost
• USDA Releases Initial Estimates for 2019-20
• Export Reports Caught Up, Sales Still on Pace
• Traders Turn Attention to Other Fundamental Factors

Cotton prices whipsawed higher then lower in this week’s market action. Positive talk about China significantly increasing U.S. agricultural imports as part of the trade dispute resolution sent the market shooting higher on Thursday. May futures jumped to 74.35 cents per pound Thursday and touched 75.16 cents overnight Friday. Unfortunately, the market gave back most of its gains this morning, falling back to a low of 71.85 before bouncing up to settle at 73.01, up 115 points from last Friday. Volume was significant, and open interest fell to 216,593 contracts, down 22,158 for the week.

WORLD PRODUCTION/CONSUMPTION FORECASTS

USDA’s Agricultural Outlook forum released its initial estimates of 2019-20 supply and demand on Friday morning. By USDA rules, the outlook makes no guesses but rather uses standard assumptions about production, consumption, and trade based on today’s situation, which includes the ongoing trade dispute with China. Under such conditions, USDA forecast world production for 2019-20 at 126.5 million bales, with every major producing country increasing their crop. Consumption was placed at 125.5 million bales, up 1.5 percent. In sum, USDA expected world ending stocks to increase one million bales, putting the ratio of stocks-to-use marginally lower.

U.S. FORECASTS SOMEWHAT BEARISH

USDA’s U.S. production forecast largely followed the National Cotton Council’s projection. Planted acreage was forecast at 14.25 million acres. With abandonment at the low level of 9.3 percent and average yield of 835 pounds, the report predicted total U.S. production at 22.50 million statistical bales. U.S. exports were expected to increase to 17.00 million bales, and U.S. ending stocks are expected to increase to 6.3 million bales, which puts the expected stocks-to-use ratio at the end of next year at 31 percent. The report was not far from market expectations but seemed to add to Friday’s bearish mood.

EXPORT SALES REPORT COVERS SIX-WEEK PERIOD

Today also saw the release of the “catch up” export sales report. In the six-week period ending February 14, new Upland sales totaled 1.32 million bales, but 338,700 bales of cancellations put net new sales at 977,100 bales. Upland export shipments totaled 1.43 million bales. Upland and Pima combined export commitments are at 84.5 percent of USDA’s 15.0 million-bale forecast for 2018-19, just slightly behind last year’s pace. Despite being on pace to hit USDA’s target, the market seems to have been disappointed with today’s report. Prices fell into negative territory immediately after release of the report.

TRADE NEGOTIATIONS MAKE PROGRESS

International trade now takes center stage as traders of all sorts continue to guess what the outcome of ongoing U.S.-China negotiations will be. News coverage this week was upbeat as both sides signaled breakthroughs and progress. Markets also were happy to hear that negotiations had started to take written form as the teams draft memorandums of understanding. Leaks and rumors of large U.S. agricultural purchases supported the markets. Although it may be extended slightly, it is hoped that an agreement will be reached before next Friday, the March 1 deadline.

LOOKING AT FUNDAMENTALS

The weight of the trade negotiations swamps all other concerns in the near future, but traders also have turned their attention to the next marketing year and forecasts of supply and demand. Soil moisture maps, long-term weather reports, and planting estimates will start to garner attention. The next official estimate of planting will be USDA’s Prospective Plantings report, which will be released March 29. Consumption has a lot to do with the U.S.-China trade dispute resolution, but there is also plenty of concern about Brexit and world economic growth. Nevertheless, traders’ immediate attention will go to the last few catch up Commitments of Traders and Cotton On-Call repots, as well as next week’s Export Sales report.

IN THE WEEK AHEAD:

• Monday – Cotton On-Call as of February 8, 2018.
• Tuesday at 2:30 p.m. Central – Commitments of Traders as of February 12.
• Thursday at 7:30 a.m. Central – Export Sales Report
• Thursday at 2:30 p.m. Central – Cotton On-Call as of February 15, 2018.
• Friday at 2:30 p.m. Central – Commitments of Traders as of February 19.