November has brought the release of new USDA supply and demand projections for major U.S. crops. The government acronym for this report is WASDE, which sort of sounds like the dice game Yahtzee (and perhaps has some parallels to rolling the dice).The WASDE data are projections of important crop supply and demand variables, culminating in a calculation of projected ending stocks. For cotton, that is the expected number of bales left over when the marketing year ends on July 31, 2015.
It is easy to get lost in the numbers, but the bottom line has a straightforward interpretation: If the expectation is for ending stocks to increase (or decrease), then prices should weaken (or strengthen).Our focus then turns to the more uncertain elements that have potential to impact the bottom line.
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The November projections of U.S. cotton supply and demand numbers had only a few changes. The all-cotton yield forecast was raised a little to 797 pounds per acre, which bumped up forecasted production by 140,000 bales. This is a relatively modest and somewhat anticipated adjustment. With no other major changes (exports remained at 10 million bales), the forecast of U.S. cotton ending stocks rose accordingly, which would ordinarily have a neutral to bearish implication for cotton prices. ICE cotton futures certainly did not like the result, with contracts settling lower on November 10.
Since cotton is a globally traded crop, the changes to the world cotton numbers are also very important. Similarly to the domestic picture, the November WASDE numbers showed relatively small and offsetting adjustments for cotton. A half-million bale decrease in China’s projected production was offset by a half-million bale decrease in their expected mill use. China’s imports projection was unchanged at seven million bales. Other changes in cotton producing countries were mostly offsetting. Altogether, projected world ending stocks were 250,000 bales higher in November compared to the previous month. This again represents a modest adjustment that would be neutral/bearish in its implication.
With no huge change this month, I want to focus on the variables that have the most potential to change: the trade variables. The U.S. and world balance sheets are linked via the export/import categories. Since U.S. cotton is mainly an export industry, anything that affects U.S. cotton exports will affect ending stocks, which, in turn, is the main determinant of price. This is especially true for the demand-influenced March, May and July cotton futures contracts.
Several things are troublesome on the trade horizon. First is the emerging issue of an anti-dumping inquiry by Turkey against shippers of U.S. cotton. While too early to size up, this situation is serious because Turkey is a major destination of U.S. cotton exports. The other area of concern regards the potential for China to substitute domestic cotton for imports. This possibility involves a number of factors, including 1) the size and quality of their 2014 crop, 2) the quality and auction prices for bales coming out of the Chinese government reserve, 3) the extent to which China’s new target price subsidy in Xinjiang Province induces their mills to substitute cheaper new crop bales for imports, 4) the extent to which the watered down target price subsidy has the same effect in other Chinese provinces, and 5) the extent to which China blocks further imports by limiting available import quota for foreign cotton.
That is a lot of things to think about. Whether they are influencing U.S. cotton exports will be tracked by weekly export sales reports, and the unfolding calendar of upcoming WASDE reports.