USDA’s April supply and demand numbers for cotton didn’t reveal much on the face of it. The monthly revisions to 2017/18 world cotton supply and demand were neutral in terms of month-over-month changes to ending stocks.
There really weren’t that many adjustments, which is not unusual as we move later into the marketing year. The biggest source of changes involved historical revisions in Brazil and Australia, going back seven years. These ended up increasing the 2017/18 carry-in by 700,000 bales in Brazil and 200,000 bales in Australia. Other changes in other categories offered nothing really unexpected, other than not cutting India’s production.
The bottom line of all this was a 560,000 bale decrease in world ending stocks, month-over-month. Such an adjustment would be price neutral, according to economic theory and history.
The April revisions to 2017/18 U.S. cotton involved another increase in U.S. exports (up 200,000 bales month-over-month, after increasing them by 300,000 bales in March).
Like the previous month, this adjustment was attributed by USDA to the strong pace of recent sales and shipments. With no other changes to the U.S. balance sheet, the export adjustment went straight to the bottom line for a month-over-month downward adjustment from 5.5 million to 5.3 million bales of ending stocks. This adjustment would have neutral to bullish implications according to historical patterns.
The adjustment to exports and ending stocks highlights the most likely pattern of future changes. Because of strong demand, and perhaps short crops in places like India, there is an expectation that USDA will raise the U.S. export forecast even higher.
The current level of total export commitments suggests that USDA’s target has to be about 4 percent higher, assuming we ship all of the cotton sold (that is, assuming no cancellations or logistical bottlenecks). And if more U.S. bales are sold for delivery before Aug. 1, that will reinforce the need for an upward adjustment in USDA’s current target of 15.0 million.
A LESS BEARISH SCENARIO
The guesses of how high the final export number will be range from 15.5 million bales to 16.0 million bales, which has the potential to lower 2017/18 ending stocks to 4-something million bales.
Strictly by the numbers, that represents a less bearish scenario, since it is still a doubling of ending stocks year-over-year. The most relevant impact is that a carry-in of 4-something million bales, plus a 19 million bale crop in 2018, sets the market up for excess supply and potential price weakness in 2018/19 (see Figure 1).
That possibility highlights the need for considering forward pricing or hedging of some portion of the 2018 crop.
Remember: The only thing you can know for sure is whether a forward contract or hedge on today’s futures price will be a profitable — or at least survivable — price floor.
For additional thoughts on these and other cotton marketing topics, please visit by weekly on-line newsletter at http://agrilife.org/cottonmarketing/.