The February WASDE numbers from USDA were not friendly to the cotton market. Adjustments to foreign balance sheets mainly showed big cuts in expected mill use in important places like China, India, and Pakistan. This means that it will take longer to eat away at excess world supplies. The trade categories of the foreign balance sheet were also lower, which is but another indicator of weak global demand for cotton.
Closer to home, the big adjustment in the February WASDE report was a large 500,000 bale cut in U.S. exports. This downward revision was not unexpected, but the size of it was apparently jarring to the market. New York cotton futures settled over a cent lower on the report day (February 9) with most of the contracts hitting 52-week lows. This cut in exports went straight to the bottom line, increasing forecasted carry-over from 3.1 to 3.6 million bales.
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The upwardly revised carry-over means that the U.S. cotton market is treading water, i.e., starting off with 3.7 million bales and winding up with almost as much. History indicates that cotton prices tend to be relatively flatter and range-bound in those sorts of years (see Figure 1, blue line) and indeed that is what we observed for the Dec. ’15 price pattern (Figure 1, green line) and remaining old crop contracts. This is yet another fundamental reason to explain why cotton futures have been stuck in the 60s for well over a year.
The real question is whether 2016 will be any different. It is hard for me to see why it would be. I have to be careful here and not fall prey to the tunnel vision of recent history. Still, many fundamental aspects of the new crop situation are similar to 2015. The influence of the Chinese reserves should be similar since the Chinese reserves will still likely be around. The dollar may remain strong. Crude oil (and polyester) may remain cheap. Consumers may remain cautious. In short, all the bearish demand influences that kept old crop futures range-bound may still be in play for the 2016 crop.
On the supply side, the 2016 crop may start off with a relatively small acreage planted into good moisture. Again, this is similar to 2015. The National Cotton Council’s early benchmark of planted acreage is 9.1 million acres, which is still fairly low.
So what might be different during 2016? There could be a surprise on the production side. On the one hand, if the lingering moisture results in low abandonment and very strong yields, there could be 14 million or more bales of new crop production. Such an outcome would reinforce and perhaps add to the neutral outcome for 2016/17 ending stocks, and keep prices grounded.
Of course, there is the other possibility—a small planted acreage encounters a poor start or mid-summer drought or poor harvest conditions. Such a development during the growing season might temporarily push futures to their seasonal highs. But I would not expect such a weather market rally to last until harvest time. The longer term demand support is just not there.
For additional thoughts on these and other cotton marketing topics, please visit my weekly on-line newsletter at http://agrilife.org/cottonmarketing/.