Weekly Commodity Market Recap: Cotton

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In anticipation of the USDA’s next release in coming days of the latest U.S. cotton supply and demand projections for new-crop cotton, FCStone prepared forecasts and commentary on how these projections may change from recent months:

U.S. production for 2010-2011: Down 300,000 bales to 18.5 million bales. While yields are still likely to be well above last year, crop conditions generally have eased gradually over the last two months across much of the cotton belt, suggesting yields may not be as robust as earlier anticipated. While this trend is happening in several states, we are keeping a close eye on Texas and the Carolinas. Here, the northeastern corner of the cotton belt received well over eight inches of rain last week, drenching open-boll cotton and fading harvest prospects. Also, the condition of the Texas crop still in the field has eroded to the lowest since June, dimming earlier optimism somewhat.

U.S. Exports: Up for the fourth straight month, rising from 15.5 million to 15.7 million bales. Already, early-season commitments stand at a record 8.9 million running bales, hinting at robust exports later this marketing year. Adverse pre-harvest weather in several cotton-growing areas of China was unwelcome and may hinder production and quality, suggesting the world’s largest importer may need to import even more fiber in 2010/11, with much of that coming from the U.S. What’s more, delayed exports from India discussed here also could bode well for shippers in the U.S. and Australia this marketing year.

U.S. Ending Stocks: With a likely smaller anticipated supply and projected demand bigger from last month, ending stock forecasts for October are likely lower by 500,000 bales from September to 2.2 million bales, the lowest level in more than five decades. Unsurprisingly, recent daily closes on The ICE here touched the highest levels in years in response. We look for the USDA to find expectations of higher demand and lower ending stocks will tighten the anticipated stocks-to-use ratio this year to closer to 14%. This would be the tightest ratio since 1994/95—the last time average prices were as high—and supportive of elevated prices well into the winter.

In spite of this increasingly tighter outlook for U.S. cotton fundamentals, we caution that any increase in U.S. prices may not be commensurate with the tightening in the balance sheet, as it has been over recent months. As the graph below demonstrates, the jump in futures prices has outpaced the tightening in the stocks-to-use ratio over the last two months. And October’s anticipated 12% ratio—while tighter than any point in years—still is not tight enough to support average September prices, let alone even higher prices in October. This extrapolation brings with it the pitfalls inherent in any extrapolation; we caution that October prices even could slide modestly lower, despite the tighter outlook for the domestic market.

While the anticipated tighter evolution of domestic fundamentals is impressive, we temper this outlook with a forecast for looser global balance sheet. In particular, we look for the Indian harvest to jump to a record size, on the strength of unprecedented yields. That having been said, it may be a few months before Indian policymakers allow new-crop shipments to resume, suggesting global exports—and world prices—may remain dear through the conclusion of harvest.