Recent Price Movement
After grinding slowly, but steadily, lower throughout the month of July, December futures stepped through support near 63 cents/lb last week and dropped below the range between 63 and 68 cents/lb that had held them since Mid-March.
However, this week’s USDA numbers resulted in a sharp turnaround, with prices for December rebounding back to levels near to the 65 cent mark, putting them right back in the middle of the range they have traded in since the spring.
Big Changes to US Forecasts
This week’s revised set of USDA forecast likely drove the surge in prices.
The report featured a very large 10% reduction to the U.S. crop number, which dropped the projected harvest from 14.5 to 13.1 million bales.
Behind the reduction was a combination of lower planted acres, increased abandonment, and a reduction in estimated yield.
It is not uncommon for there to be significant revisions in August. That is because the USDA makes a transition from analyst-based estimates to those built off field surveys this month.
This year, substantial revisions could have been expected given the uncertainty posed by the heavy rainfall throughout the cotton belt this spring and the questions about how it might have affected planting and yields.
In addition to the changes made for production, there were also revisions to export figures. As was expected, the old crop estimate was increased slightly. This had the effect of lowering carryout into the 2015 season.
For new crop year, the export figure was revised lower in response to the big drop in the production number.
However, the decrease in the harvest estimate was larger than the reduction in exports. This implied a decrease in the forecast for ending stocks in the new crop year.
At 3.1 million bales, the current forecast for 2015/16 ending stocks is at a level that can be considered tight and this likely generated the signal that prices needed to pick up a bit.
It is early, and big revisions can have a tendency to be dialed back in later months, but this month’s changes do alter the outlook for prices somewhat.
Global Stocks High, but Foreign Production Estimates Lowered
The reason that we have to say somewhat is that while U.S. stocks look to be limited, there is still a lot of cotton in other countries.
China can supply its mills with cotton from its warehouses for nearly two years without growing any and without importing.
India still has about half of last year’s harvest in government control and may have to start working some of that cotton onto the market in a more aggressive manner before the next crop starts being collected.
These international factors could limit the upside potential for prices despite the tightening here in the U.S.
Nonetheless, production forecasts for both China and India decreased in the latest USDA numbers. The decrease in China was tied to excessive heat, while the decrease in India was related to delays in planting.
While lower production outside of the U.S. is helpful for the price outlook, it likely will take a sustained increase in global demand to get prices back up to more attractive levels.