The bulls took a shellacking on the week, with most of the collapse occurring on the first two trading days of the week. Hurricane Irma’s path up the spine of Florida, which quickly sapped it of its vigor, and a very bearish Sept WASDE report had longs rushing for the exits. Dec gave up 552 points on the week while Mar gave back 542, leaving the Dec – Mar spread strong inverted at 108.
In the September WASDE, the USDA enhanced its US production estimate by around 1.2M bales to an almost unbelievable 21.76M bales – that is nearly 1M bales per month over the last quarter (2.75M since July 12). “Unbelievable” seems like an appropriate adjective, given that the USDA posted a belated note the evening after the WASDE report’s release stating that it had not made any adjustments for either Harvey or Irma – in essence “believe this report at your own risk”. If the market had taken the contents of the report in earnest Dec would likely have already touched the 65.00 level.
The lack of adjustment for potential yield damage inflicted by the Irma was understandable, but much less so for Harvey. Harvey struck southeastern Texas during the middle of the last 10 days of Aug – the monthly time frame when USDA seasonal personnel trek across fields of several major cotton producing states. So it seems like a decision not to send those folks into the fields ahead of Harvey was wise. Still, enough information was available, both publicly and from organizations and companies within the private sector from whom the USDA regularly receives information to have made a token (at least) downward adjustment to the states production potential. The USDA-RMA crop insurance loss ratio (indemnity divided by premium) has nearly doubled since early Aug.
We have been one of the more conservative estimate producing organizations with respect to Harvey, but it is not difficult to see that a 250K bale reduction in overall production seems a given. It is likely closer to 400K – 500K, perhaps more. As stated above, damage via Irma seems likely a fraction of what the potential was at this time last week, but it is also difficult to believe (at least for us) that no yield potential was forfeited to the storm’s rain and winds. It certainly did not do the crop any favors.
AgFax Southeast Cotton: How Much Crop Did Irma Chew Up? 9-15
AgFax Southwest Cotton: Weed Control Success; More on Harvey; Heat Units Still Needed 9-13
Yield projections employed in the construction of the latest balance sheet also seem a bit overdone. They do not correlate with the producer and consultant reports that we have received nor do they align with the results of our own field observations. To be certain, if harvest weather cooperates, we think the US has the potential for a bumper crop, but our glasses are a shade or two less rose tinted that those the USDA donned when preparing its latest reports.
Still, not all the USDA’s domestic production estimate is “smoke and mirrors”. We said in this column in early Aug that planted area would likely be estimated at no less than 12.3M acres (and potentially as high as 12.5M acres) for the Sept WASDE report; it was estimated at 12.62M acres. For what it’s worth, the USDA seems to have extrapolated additional certified acres that are likely to be reported by Jan, 2018, as well as any cotton acreage that is not to be certified.
We are currently working on an updated in-house domestic supply and demand balance sheet that incorporates all pertinent information and that will, hopefully, provide additional insight regarding a realistic domestic production estimate.
Despite popular misgivings regarding the domestic balance sheet, the aggregate world balance sheet was out-and-out bearish. 2017/18 production is currently projected to outpace consumption by 3M bales – by 1.8M if all of the latest domestic production enhancements are somehow negated. Given the fact that aggregate world demand is currently projected at 117.75M bales (the highest since the 2006/2007 and 2008/2009 marketing years and the third highest on record) this is saying quite a bit regarding the robustness of the world’s production potential this season. Still, production might not ultimately outpace demand in 2017/18; the crop is a long way from harvested (or even sown in the southern hemisphere) and consumption could rival the levels of 2006 – 2008, but crossing the 120M bales line seems a daunting task given current fiber share statistics. Further, China has not recorded a noticeable reduction in off-take at its daily reserve auctions since traders and merchants were excluded from participation on Sept 1.
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China has now sold nearly 13.5M bales of its massive reserve stockpile since early Mar, which suggests that it might well import more than its currently projected 5.1M bales – perhaps significantly more. It is a given that China will return to be a major import player, despite its cooperative production efforts in the African Franc Zone, Syria and the like; timing remains the essential question. Given current cash prices for raw cotton in China, the nation could potentially bargain hunt for its quality-challenged reserve. Further, the central government could also issue an additional import quota for its vast mill sector.
However, none of this seems likely to occur before Jan – and probably not until the spring of 2018, at the earliest. Still, it seems that paying close attention to up-to-date production estimates out of China is a prudent undertaking for market participants. Given the current bearish supply side climate, it does not seem unreasonable to postulate that some of the world’s projected 53M bale ending stocks projection – excluding China (perhaps the most damning statistic in the entire report) – should find its way to the world’s largest consumer of raw cotton.
US export business was lackluster for the week ending Sept 7, with sales and shipments falling a week short of the weekly pace required to meet the USDA’s upwardly revised export target of 14.9M bales. The recent ascension in ICE futures bears most of the blame, but quality concerns likely also played a role. India has reportedly booked around 800K bales of export sales since Harvey made landfall along the Texas coastline.
On the production side, clear skies and warmer temperatures across The Belt should allow defoliation treatments to rapidly gain momentum. One can now smell defoliants in the air across the southern US with more pickers headed to the fields on daily basis. With harvest upon us, one Delta grower summed up the season with, “It’s time to get it”.
While all eyes are on damage assessments from South Texas, the Southeast and Delta over the past three weeks, the West Texas Plains have received excellent weather, which should prove beneficial to finish out a huge cotton crop in the region. The four districts that make up the plains are estimated to produce 6.8 million bales of cotton. All merchant and trader eyes are now focused on early yield and quality reports.
Our broker and merchant friends tell us producers took good advantage of the hurricane rallies. Most of the producers we talk to regularly are between 50% and 80% priced, and we think that’s a good place to be. Given the widening of the forward contracting basis, merchants’ natural preference for spot cotton over contracted cotton, and a market trading below producer price targets, opportunities to forward contract will be limited in the next few weeks. The next best opportunity to price cotton may well come with the combination of early cotton and an October WASDE.
For next week, the standard weekly technical analysis for and money flow into the Dec contract are bearish, but the market is again flirting with a short-term oversold condition. Regardless of doubts regarding US production potential, the market will likely need to find a level where large export sales and mill on-call fixations can be perceived to be profitable for mills before specs can feel comfortable once again treading into significant long positions. The gaps below the market at 68.15 – 68.30 and just north of 66.50 seem likely to be filled over the near- to medium-term, especially given that US harvest pressure is poised to ramp up significantly later this month and into early Oct.
Have a great weekend!
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