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COTTON SPIN: Late and large cuts to U.S. cotton

TAGS: Outlook WASDE
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Stocks-to-use ratio drops from 40% in November to 26%

The January WASDE (World Agricultural Supply and Demand Estimates) report from USDA saw moderate tightening to the foreign and world cotton balance sheets for the 20/21 marketing year. On the supply side, world beginning stocks were a net 140,000 bales fewer, month over month.  This resulted from modest tightening in West Africa, partially offset by an increase in Bangladesh.  In addition, world production was cut 1.1 million bales, month over month. Most of this adjustment was in the U.S. with modest adjustments in West Africa and Australia offsetting each other.   

On the demand side, world imports and exports were both raised by over three million bales, similar to the December monthly adjustment. The net adjustment to world domestic consumption was a small 100,000 bales increase over the December forecast, resulting from increases in China (+500,000 bales) and Turkey (+200,000 bales) and offset by a U.S. cut (100,000 bales) plus smaller adjustments. The bottom line of all these changes was a 1.2 million bale decrease in world ending stocks, month over month, which is fundamentally neutral-to-supportive in terms of the monthly adjustment.  The resulting level of 96.3 million bales in world ending stocks continues to take the edge off the previously bearishly high level. 

The U.S. cotton balance sheet had three main bullish adjustments.  Longstanding and persistent expectations (by others…  I was too cautious) of a much smaller U.S. crop continue to be vindicated by USDA’s lowering cutting another million bales of forecasted U.S. production, on top of the 1.14 million bale decrease in December. This month’s adjustment resulted from slightly lower plantings and higher abandonment, plus another cut to harvested yield per acre.  It is unusual to have such a large adjustment so late in the marketing year, but there it is.  The U.S. consumption adjustments were also net tightening.  U.S. domestic milling was cut 100,000 bales, but U.S. exports were increased 250,000 bales month over month (that is on top of the 400,000 bale increase to U.S. exports in December).   

So, the result of less supply and increased consumption was another historically large 1.1 million bale cut in forecasted ending stocks, month-over-month.  The resulting stocks-to-use ratio has now dropped from 40% in November to 33% in December and now 26%.  All of these monthly adjustments are price supportive, and their anticipation was already reflected in the recent market rally. That’s not to say that old crop prices might not head higher – as I write this, old crop cotton futures are in the lower 80s, up almost a cent on the day, and new crop December 21 is pushing 78 cents.   

The new year upward trend appears to be feeding on itself, but the likelihood of continued rallying is difficult to predict.  We are out of the realm of fundamentals. My main suggestion is to take a little of what the market is offering you on any given day. Sell or hedge some, and if you’re wrong and the market goes higher, sell/hedge some more.  Nobody can ultimately say where prices will be tomorrow.  The only thing you know for sure is what the market is telling you today.      

For additional thoughts on these and other cotton marketing topics, please visit my weekly on-line newsletter at http://agrilife.org/cottonmarketing/.  

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