The August WASDE report brought more tightening to the U.S. cotton supply and demand picture, but in a surprising manner. Most analysts were expecting an increase in U.S. cotton production, offset by an increase in U.S. exports. We got the opposite.
First, the old crop carry-in was cut 50,000 bales month over month because of lowered old crop exports. Some questions remain about squaring the 20/21 export shipments with the total forecast, but that will soon be resolved.
The big surprise was in USDA’s adjustment to their monthly forecast of U.S. cotton production. Going into the report, the consensus of expectations was for a month-over-month increase in size of the U.S. crop. This is mainly because the weekly condition ratings for both the U.S. crop and the Texas crop are higher than in recent years.
However, USDA lowered their cotton production forecast by 340,000 bales as a result of slightly increasing abandonment (from 10% to 11.6%) and lowering yield fourteen pounds per acre. The yield adjustment was driven by a lowering of forecasted Texas yield, which is a puzzle. How can Texas yield be that low when the Texas crop condition ratings are so good? The only answer I have is that the relatively low abandonment means that a lot of low yielding dryland cotton will get harvested and pull down the overall Texas and U.S. average yield.
But a lot of that is still uncertain. The Texas crop is late everywhere. Average to good looking cotton fields all need good conditions to finish. Will they get those conditions? Will the South Texas crop dodge hurricanes? Will the North and West Texas crops get the needed mixture of heat units and timely rains, as well as sunny/warm fall season and a late freeze? Nobody knows.
There is therefore a lot of room for price volatility in both directions as the current balance sheet gets updated. The currently projected three million bale ending stocks outcome is tight enough to support futures in the current low-to-mid 90 cent range (as of this writing). Going forward, any surprises in the form of lower production from inadequate heat units, flooding, tropical storm damage, inadequate maturation, sloppy wet fall weather, or an early freeze could push prices towards a dollar. On the other hand, a few million extra bales from a good growth, maturation, and harvest conditions could pressure prices back into the 80s in the fall.
It’s nice to be talking about prices in the 80s and 90s. I would strongly suggest that growers sell or hedge some portion of expected production at these historically high and profitable prices that the market is currently offering.
For additional thoughts on these and other cotton marketing topics, visit my weekly on-line newsletter at http://agrilife.org/cottonmarketing/.