Cotton prices caught a break this week from what many called a neutral world supply demand report. The declining volume of world cotton stocks was the highlight of USDA’s October report and rode the wave nearly 200 points higher as it pressured the 79 cent level before settling the week at 78.37. Adding to bullishness of lower global stocks was the likely damage caused by Hurricane Michael’s destruction in southeast Alabama and some catastrophic destruction in big cotton plantings in Southwest Georgia where growers were on the verge of harvesting a bumper crop. Estimates of losses due to Michael were upwards to one million bales, but look for the number to be closer to 300,000 to 400,000 bales which, in itself, would represent a disaster of gigantic proportions. Probably, but not confirmed, the market has found its bottom in the expected 74-75 cent area and is now back trying to break above 79.50 and await the birth of a new bull. Expect a few fighting days/weeks as the December contract attempts to move back into the low 80’s.
The tariff battle between the U.S. and China is ongoing and as stated last week I remain very much in favor of the tariff. It is the only way cotton production will survive in the U.S. as a significant part of American agriculture. Nevertheless, unless cotton growers actually receive real relief from either the market or in the form of government tariff disaster payments, a crisis is front and center in the Cotton Belt. Assuming growers are fairly compensated then the U.S. holds considerable leverage over the Chinese government in the tariff battle. The Chinese debt has all but overtaken the RMB and the economy has weakened. As a reminder, the U.S. gave its entire cotton supply chain to China in exchange for the promise of fair trade. For over 20 years the Chinese have reneged on each and every trade promise they had made to the U.S. (Actually, they have not spared other countries with their broken trade promises either.) Then, when the current U.S. administration asked the Chinese to finally honor their signed commitments, the Chinese reneged. They not only reneged, but even genuinely acted shocked that this U.S. would even ask them to obey the terms of their promises. After all, no other U.S. President had ever asked China to obey the rules.
Back to supply demand and price…In its October report USDA estimated the U.S. crop at 19.76 million bales, up 80,000 from last month. Exports were reduced 200,000 bales, down to 15.5 on the basis of tariff considerations. U.S. carryover was increased 300,000, up to 5.0 million bales. Likely, carryover stocks will be reduced to some 4.7 million when the damage from Hurricane Michael is factored in next month. The U.S. crop production and yield database can be viewed at https://release.nass.usda.gov/reports/crop1018.pdf
World production was reduced marginally and was estimated at 121.66 million bales. The principal change was in Australia which saw a reduction of 500,000 bales. That crop is just being planted and drought concerns could reduce the crop further. World consumption was marginally lowered and was forecast at 127.76 million bales. The principal change in the report was the long awaited, very long awaited, adjustment in the Indian situation. USDA revised some 15-16 years of data, ultimately lowering Indian stocks some 3 million bales. This was a major and significant adjustment for USDA. For three years we have been long lobbied USDA to correct their Indian database. Kudos to USDA for attempting to catch up. Now if they will only consider reducing those same Indian stocks another 2 million or more bales analysts will once again full respect the USDA estimates. Yet, as stated, this was a major bridge for USDA to cross. Excellent!
Thus, world ending stocks, as of July 31, 2019 are now forecast at 74.5 million bales, down some 3 million bales from last month. More importantly, world ending stocks are now forecast some 9 million bales below world beginning stocks back on August 1, 2018. This represents a major reduction on the year and has the market poised to return to the 80 cent level, hopefully fulfilling some of our more grandiose projections of a return to the low to upper 80’s. The world supply demand estimates can be viewed at https://www.usda.gov/oce/commodity/wasde/latest.pdf
New export sales are improving, although the numbers are camouflaged. Total weekly sales are beginning to increase, but “net” total sales are weak because cancellations by China bring the “net” sales down. Sooner or later other countries will pick up the slack currently left by China’s cancellations. Additionally, China will in fact come to the U.S for cotton. They will have to or either trim their spinning industry or turn to spinning low quality cheap yarns, something they have heretofore avoided at all costs. It is notable that the export cancellations by China are being rebooked for the 2019-20 season, as opposed to outright cancellations. Does that mean the Chinese tariff battle will be over by then? Let’s hope it does not linger than long, but it could.
A final note, the back end of the 2018-19 contracts are becoming lopsided with on-call sales. That is, there is a baby bull in the pen somewhere. Technically, the market has improved to just a “weak sell” compared to last week’s strong sell. The price outlook is improving. Eighty cent plus cotton is coming into the mainstream.