The USDAΆs ideas about likely changes in US production were very similar to ours, per this weekΆs WASDE report release. Their thoughts regarding ending stocks for 2013/14 in no manner resembled ours.

The latest USDA S&D balance sheet is a bit more bearish than most analysts had expected, with US ending stocks for the coming MY now projected at 4.3M bales. The world numbers were bearish, too, with ending stocks now projected at nearly 103M bales – 59% of which is expected to be sequestered within the borders of China. However, we did find the USDAΆs increase in expected world consumption of nearly 500K bales for 2014/15 encouraging.

The 800K bale cotton-bolls-12122013increase in projected world ending stocks, outside of China, and the slashing of the expected world trade level were far less encouraging.

The market discounted the June WASDE report heavily, as has occurred so often over the recent few years. After all, how much more bearish can an aggregate projected world carryout of nearly 103M bales be vs on of merely 102M bales? But this was not the major reason for the marketΆs discounting of the report; it was, in fact, the token upward adjustment of old crop exports to 10.5M bales – a figure that represents less than 98% of total commitments against the 2013/14 MY to date.

The USDA was privy to this weekΆs export numbers prior to preparing their S&D balance sheet. And, while this weekΆs net sales numbers were not stellar (just above 42K RBs), a continuation of this pace over the few remaining weeks in the current MY would push total commitments over the 11M statistical bale mark.

Shipments increased 10K RBs W/W, and continue to exceed the pace not only to meet the 10.5M bale target, but to exceed the former 10.7M bale target. If export shipments decrease 10% W/W through the end of the current MY the USDAΆs revised target will be all but met. However, since Jan 30 of this year, export sales have decreased, on average, only 2.5% W/W.

In defense of the USDA, one can examine the data and see that a large amount of total commitments in any given MY being rolled to the subsequent MY is not uncommon. However, the current market environment neither encourages merchants to carry stocks nor mills to cancel sales commitments. In fact, it is quite the opposite.

And, given the persistent July – Dec inversion, it probably does not matter which MY current commitments are ultimately credited to. The vast majority of any old crop sales made prior to July 31 will likely be en route to their destination by Aug 31, and US cotton stocks are likely to be very tight until the new crop begins to be delivered in quantity.

The USDA will release its annual acreage report on Mon, June 30, and, at this time, we expect a significant reduction in area sown to cotton to be forthcoming. Memphis-based Informa Economics has disseminated an estimate of 10.77M total acres vs the USDAΆs Prospective Planting survey results of 11.101M. Our estimate is at 10.68M with associated production near 14.5M bales. However, production estimates are highly dynamic, especially at this point in the growing season.

Technically, a bearish case can be made for Dec; the same is also true from a fundamental perspective. However, recentsignificant fixations of on-call sales against the Dec contract may be relaying that Dec has traversed southward far enough – for now, at least.
For next week we expect Dec to finish near unchanged to a bit higher while trading a range of 76.50 – 79.50 on the inside or 75.50 – 81.00 on the outside.

Louis W Rose IV, PhD has worked with cotton as a producer, consultant, analyst and trader. Rose holds degrees in Education, Agriculture, Plant Science and Business (MBA) from AR St Univ, OK St Univ and the Univ of Memphis, respectively. He has held positions with Aon Reinsurance and Cargill Cotton. Rose currently provides analytic services for various clients and media outlets and is the co-founder of Risk Analytics, LLC, producers of The Rose Report, which he authors. For more info on The Rose Report or analytic services, please visit: www.rosecottonreport.com