The USDA’s September revisions of 2018/19 world cotton supply and demand involved some month-over-month additions to foreign supplies and ending stocks.
World production was raised in China, Brazil, and the U.S., which together outweighed a cut in Australia. The net increase in production outweighed reductions in Indian carry-in, as well as a 320,000-bale increase in foreign consumption, most of which was also in India. The bottom line of all this was a modest and neutral-looking 360,000-bale increase in world ending stocks, month-over-month.
The real September surprise was in the U.S. cotton adjustments. As in the prior month, USDA gave us another increase in U.S. 2018/19 supply. This happened despite a 100,000-bale reduction in 2018/19 carry-in, owing to an increase in 2017/18 U.S. mill use.
The USDA raised its U.S. production forecast by 447,000 bales, based on revised planted acreage numbers and follow-up field sampling. U.S. 2018/19 exports were raised by 200,000 bales to account for more exportable surpluses. The bottom line of these changes was a month-over-month upward adjustment from 4.6 million to 4.7 million bales of ending stocks (Table 1, Column 3).
STILL MUCH UNCERTAINTY
The expected month-over-month effect on old crop prices was bearish. However, there is still a lot of uncertainty that’s providing support for the old crop market.
First of all, Hurricane Florence has damaged some cotton in the Southeast that will perhaps lead to hundreds of thousands of fewer bales of old crop production. Second, the seasonal pace of old crop exports remains historically high. Third, there are some long-term questions about whether/how much USDA is overestimating cotton supplies in India.
All of these factors may be keeping speculative longs in the market, while keeping speculative shorts from expanding.
Another implication of the old crop adjustments is that it reinforces the excess supply problem in the new crop outlook. Even with some hurricane losses, having over 4 million bales of beginning stocks plus a 21-million bale crop adds up to a potential excess supply problem.
POTENTIAL DOWNSIDE RISK
And, I consider the supply numbers in Table 1 (Column 4) to be somewhat conservative, e.g., 850-pound yield and 10 percent abandonment. If we have a stronger El Niño effect next winter and spring, we could have higher yields and lower abandonment.
It is obviously too early to conclude anything, but it’s not too early to plan for potential downside price risk if new crop ending stocks exceed 6 million bales.
For additional thoughts on these and other cotton marketing topics, please visit my weekly on-line newsletter at http://agrilife.org/cottonmarketing/.