The USDA World Agricultural Supply and Demand Estimates for October contained a couple of surprises. The revisions of the 2018/19 world cotton numbers included a large — and long-awaited — revision to India’s historical balance sheets covering 2002-2013 crops.
For the 2018/19 balance sheet, this was reflected by a 2.9 million-bale month-over-month reduction to Indian carry-in stocks. This cut went straight to the bottom line, reducing Indian and foreign ending stocks. World production was cut 310,000 bales, mainly from a half-million bale reduction in Australia that outweighed smaller increases elsewhere. World consumption was reduced by 180,000 bales, mainly in Turkey.
The bottom line of all these adjustments was a fundamentally bullish 3.01 million bale reduction in world ending stocks, month-over-month.
The October revisions to 2018/19 U.S. cotton involved another surprising, albeit small, increase in U.S. supply. This adjustment was attributed to production increases in Texas and Georgia (pre-Hurricane Michael) that outweighed post-Hurricane Florence reductions in the Carolinas. U.S. 2018/19 exports were reduced by 200,000 bales to reflect lower world trade and consumption.
FUTURE PRODUCTION CUTS
The bottom line of these changes was a month-over-month upward adjustment from 4.7 million to 5.0 million bales of ending stocks. This adjustment would have bearish implications, according to theory and history, although the minor market response appeared to discount this report on the likely expectation that damage from Hurricane Michael will result in future cuts to U.S. production.
In addition to damage from Hurricane Michael, the ongoing problem with rainy fall weather has continued from Texas to the Atlantic seaboard. As mentioned in a previous column, this implies a likely shortage of premium color grades, in addition to some yield loss from boll rot, as well as strung-out or hardlocked bolls. Lastly, a hard freeze in Kansas, Oklahoma, and the Texas Panhandle could also limit potential yield and quality.
Besides the obvious financial implications for farmers, this scenario is delaying the market’s ability to size up the supply implications. It takes time for government enumerators to measure the post-hurricane damaged fields. It takes longer for farmers and crop insurance adjustors to sort through the process of what will and won’t be harvested.
A LOT OF UNCERTAINTY
USDA will doubtless whittle away at its November cotton production forecast. But, this sloppy harvest season is injecting a lot of uncertainty into the U.S. supply question that won’t get resolved until at least December, if not later. That means a post-hurricane rally in prices might coincide with a Santa Claus rally.
This could play out in several ways. Old crop futures prices may indeed rally as expectations become firmer about how many bales have been lost to hurricanes and rain damage. Speculative exuberance, slow physical demand, and a lack of tenderable bales might all combine to make futures prices rise faster than cash prices.
In that case, growers might be better off buying call options on Mar’19, May’19, or Jul’19 futures, rather than storing and speculating with physical bales. I think any rally in ICE futures will be confined to old crop contracts. Eventually, old crop futures may invert more strongly over Dec’19 as potentially bearish new crop fundamentals take shape.
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