The May World Agricultural Supply and Demand Estimates numbers gave market watchers two for the price of one. 

First, we got the regular monthly update of old crop (15/16) marketing year supply and demand estimates (Table 1, second column). The U.S. old crop adjustments in May mainly involved a 500,000 bale month-over-month cut in estimated U.S. exports. This went straight to the bottom line, with a 500,000 increase in estimated U.S. ending stocks, to 4.0 million bales.  

The price implication of such a month-over-month adjustment in U.S. numbers would historically be a little price weakening (Figure 1).   

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May is also the month when USDA publishes comprehensive supply and demand projections for the new crop (16/17) marketing year. The new crop numbers (Table 1, third column) had few real surprises. First, old crop carryout was raised to 4.0 million bales, which represents a hefty starting point for new crop supply. 

Because the cotton belt is starting off with relatively good moisture, USDA applied a relatively low 8 percent abandonment and a healthy projected yield of 807 pounds per acre to project 14.8 million bales of production. Given a smidgen of imports, that gives a very healthy 18.81 million bale supply.

HIGHER ENDING STOCKS

Because the U.S. tends to export more when there are more exportable surpluses, USDA projected 10.5 million bales of exports. Keeping domestic use at 3.6, the bottom line of all this was a 700,000 bale year-over-year increase in ending stocks (Table 1). 

Again history and theory suggest that would be somewhat price weakening, if it works out that way. The year-over-year change in ending stocks reflects a neutral/bearish outcome and yet another fundamental reason for the ongoing range-bound behavior of prices, with perhaps a little more downside risk. USDA reflects this price risk by including a very, very wide range of possible outcomes for average farm price (Table 1).

Speaking of risk, while the new crop numbers had few real surprises, Mother Nature still might. 

Looking at Table 1, the two major sources of potential risk in the 2016/17 numbers would be production and exports. The production number is highly subject to uncertain weather outcomes.  We will begin to have a clearer picture of this by mid-September. 

The export forecast depends on a combination of foreign production prospects, economic growth, consumer buying patterns, oil prices, currency values, and foreign (especially Chinese) farm and stocks policy. It will likely be well into 2017 before we can gauge how new crop demand is shaping up.

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