The expectations going in to USDA’s March WASDE report were for another large and seasonally late cut to U.S. production, on top of an increase in forecasted exports – in short, some significant tightening of the balance sheet. What we got was not quite as much production cutting and no increase in exports. And the cotton market didn’t like that at all.
The report saw a continuation of tightening to the foreign and world cotton balance sheets for the 20/21 marketing year. On the supply side, world production was cut 820,000 bales month over month, mostly in Brazil (-500,000 bales) and the U.S. (-250,000 bales). World imports and exports were both raised over 600,000 bales compared to the February forecast, mostly in Turkey (+200,000 bales), Pakistan (+200,000 bales), Bangladesh (+200,000 bales), and Vietnam (+100,000 bales). Domestic consumption was raised 250,000 bales month over month, from increases in those same four importing countries, which outweighed decreases in the U.S. and Mexico.
The bottom line of all these adjustments was a 1.15 million bale decrease in world ending stocks, month over month, which is fundamentally price supportive in the monthly adjustment. The resulting level of 94.59 million bales in world ending stocks continues to take the edge off the previously bearishly high level.
The U.S. cotton balance sheet had relatively minor and partially offsetting adjustments. U.S. cotton production was cut 250,000 bales, to bring it in line with newly released ginnings data. (Prior expectations had been for a larger cut in production to match an earlier and larger discrepancy to the previous week’s classings data.)
The February forecast of U.S. exports was unchanged this month. Forecasted U.S. domestic use, however, was cut 100,000 bales, reportedly to reflect constraints on available labor and trucking. The bottom line of this was a 100,000 bale cut in forecasted ending stocks, month over month. The resulting stocks levels are historically neutral according to history and economic theory but this is a set-up for significant fundamental tightening in 2021.
But, as I said, the cotton market didn’t care for any of this. On the day of the report, ICE cotton futures settled down the four-cent limit. But such corrections shouldn’t come as a surprise. The fundamental picture for the new crop is still very uncertain and potentially tight. I expect that will keep Dec’21 futures supported well above 80 cents for a while. And the old crop dynamics that pushed May’21 and Jul’21 futures to 95 cents could push them towards a dollar.
Just remember, the only thing we know for certain is what the market is telling you right now.
For additional thoughts on these and other cotton marketing topics, visit my weekly on-line newsletter at http://agrilife.org/cottonmarketing/.