The market reaction to the July adjustment was bearish, continuing a pattern of price weakness.
In a previous column I discussed how adjustments by USDA in projected U.S. cotton acreage abandonment and production have led me to adjust my price outlook, both higher (in May) and lower (in June). July saw yet another change to USDA’s forecasts of cotton supply and demand variables.
Besides bearish tinkering with the world numbers, USDA increased forecasted U.S. cotton production by 1.5 million bales, basically for the same reason as in June (i.e., improved moisture conditions, expectations of greater germination, improved crop condition, and lower abandonment). In addition, the expected planted acreage was increased to reflect the June 30 Planted Acreage report. The combination of reduced abandonment and increased acreage resulted in the increase from 15 million to 16.5 million bales of expected production.
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The market reaction to the July adjustment was bearish, continuing a pattern of price weakness. The blue line in Figure 1 shows how December ’14 cotton futures have declined about 18 cents from early May through July 22. A large impetus for this decline is liquidation and outright selling by speculative funds. The bearish month-over-month adjustments by USDA have encouraged this selling. Further, the year-over-year increase in ending stocks puts December ’14 in a bearish seasonal pattern (red line in Figure 1), with historical weakness setting in by late summer.
Two other recent events are “piling on” the bearish factors. The first is the possibility of a weaker El Niño effect, resulting in perhaps more normal moisture patterns for the remainder of India’s monsoon season. (The other side of that coin is that a weaker El Niño means not as much late summer/fall/winter moisture in the U.S. However, the Texas crop is only two or three really good rains away from a very large number of harvested acres, so the El Niño variable may be less relevant.).
The second factor is the possibility that the early dryness in India has led to more cotton planted relative to other more sensitive crops. Were the situation in India to play out this way, it would minimize the main bullish factor in the outlook for the 2014/15 cotton market, i.e., the possibility of a short cotton crop in India. The futures market reacted bearishly the day this report of Indian acreage hit the press – breaking out of the mid-July “bottom” to the downside (Figure 1).
All of this fundamental re-adjusting suggests a likely trading range for December ’14 from the low 60s to the mid 70s. The August and September USDA supply/demand reports will be important benchmarks of the production estimate. This year, in particular, there is quite a bit of late planted cotton in West Texas whose production potential may not be accurately assessed in mid-August. So the September and October reports may be more than usually influential in confirming or re-shaping the production picture.