USDA’s December WASDE report finally revealed relatively large cuts to U.S. 2020 crop production, which tightened up the U.S. and world balance sheets. On the supply side, world production was lowered by 2.21 million bales, month over month, mostly in the U.S. (-52%), India (-23%), and Pakistan (-23%). World imports and exports were both raised about a third of a million bales. Domestic consumption was raised 1.58 million bales from the November forecast, most of which was in India (+1M bales) and Chinas (+0.5M bales).
The bottom line of all these adjustments was a 3.92 million bale decrease in world ending stocks, month over month. This is fundamentally price supportive in the monthly adjustment. The resulting level of 97.52 million bales in world ending stocks also takes the edge off the previously bearishly high level.
The U.S. cotton balance sheet actually had two major bullish adjustments. Longstanding and persistent expectations of a smaller U.S. crop were vindicated by USDA’s lowering of average U.S. all cotton yield by 61 pounds per acre, translating to a 1.14 million bale decrease in 2020 production. In addition, U.S. exports were increased 400,000 bales, month over month. It is not typical for export projections to increase when exportable surpluses are being reduced, but there it is.
The result of less supply and increased consumption was an historically large 1.5 million bale cut in forecasted ending stocks, month over month. The resulting stocks-to-use ratio was reduced from 40% to 33%.
These U.S. monthly adjustments should be price supportive, or perhaps price explanatory. That is, the price effect of a big cut in U.S. production was already baked in to the recent range of futures trading.
It is always possible for hedge fund buying or index fund reallocating to bump another couple of cents into ICE cotton futures. But I wouldn’t expect a sustained surge in old crop prices. First, there will be hedge selling pressure. Second, recent export sales patterns show that commercial mill demand is at lower 70s levels. Third, the hedge funds have less to gamble with, at least on the supply side.
The most bullish price effect of this tightening is probably in the new crop balance sheet. Assuming a La Nina drought results in only a 16 million bale crop, carrying in only 5.8 million bales lowers the supply that much more. We might end up with only 4 million bales of ending stocks for the 21/22 marketing year. That outcome could be a recipe for Dec’21 futures to spend a while trading from the lower to upper 70s.
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