The USDA December forecasts of cotton supply and demand variables had both the expected and unexpected. The forecast of world numbers showed a big cut in U.S. production plus minor production changes (mostly cuts) in a few foreign countries. What was perhaps expected was a cut in world consumption by 1.25 million bales. These reductions were dominated by half-million bale cuts in both Chinese and Indian consumption. The bottom line was a 720,000-bale increase in forecasted world ending stocks. With this year’s longstanding trend of bearish world ending stock forecasts, this news is getting almost tiresome.
The bigger surprise in the December numbers came on the U.S. side. It is a normal thing for the financial media to survey cotton analysts for their opinions prior to these USDA reports. This month the average views of the analysts surveyed by Dow Jones indicated little change in either the U.S. cotton production number or U.S. cotton exports. Full disclosure: I was one of the analysts who didn’t see much rationale in why either of those numbers would change. I didn’t see the pace of export sales as anything dramatic, and by this time of the year I figured the production estimate was becoming less variable.
Well, I and the others were half correct. The December forecast of U.S. cotton exports remained at 10 million bales. However, there was almost a half-million bale cut in forecasted U.S. production, month-over-month. This represents a 3 percent adjustment, which is a little surprising given how late in the season it is. The changes resulted from changes in yield (harvested acres remained unchanged). Some states saw month-over-month increases, but yield declines in Georgia and Texas outweighed the gains elsewhere. The Texas High Plains and Rolling Plains regions were all downgraded in their production forecast – again, all from yields being revised lower. A possibility remains of additional production tinkering if USDA adjusts the harvested acres number (i.e., if some late adjusted acres get shredded instead of harvested. I would think that would have already happened by now).
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The bottom line as always is to ask how ending stocks were affected. Reduced production with no change in consumption resulted in a 500,000-bale tightening of U.S. ending stocks. Ordinarily this would have a price supporting implication, as the history shows in Figure 1. However, futures markets are influenced by other things, too. On December 10, this friendly USDA report did not result in higher prices for New York cotton futures. However, the market will digest this latest adjustment, and the speculative money will have its short term influence, and we will see what the New Year will bring.