By Dr. O.A. Cleveland
USDA gave us a mildly bullish supply demand report for November. And, after a typical market fake-out, prices reversed and moved higher, ending the week back above 69 cents. The report was expected in that world consumption was increased and world carryover was lowered.
Conversation leading up to the report was notably nervous as many talked in terms of making a possible new low. Yet, while the U.S. crop was judged higher, as was U.S. carryover, the more important decline in world stocks led the market higher. Thus, as expected, the long held five-cent trading range 65-70 (+/-) cents will continue, most likely into the December supply demand report.
Further, there is presently little reason to expect the very tight 67-70 cent range to be broken, other than such a narrow range is typically short-lived. Some still feel that a trip to the very low 60s is imminent, as growers could become more aggressive sellers, as the end of the year and first of the New Year farmer selling looms. Certainly, that is at least 300 points below my thoughts.
In its report, USDA raised its estimate of the U.S crop 300,000 bales, up to 21.4 million. The crop size was increased based on USDA increasing the average U.S. yield to 900 pounds per acre. All states in the Southeast averaged at least 900 pounds per acre, and all states in the Mid-South averaged above 1,000 pounds per acre.
U.S. carryover was increased 300,000 bales, up to 6.1 million. Certainly a few more hands must be played, but the odds favor a somewhat smaller final crop size and bigger export number. Thus, a carryover closer to 5.5-5.6 million bales is likely on the horizon.
U.S. cotton is the most competitive in the world. With futures between 67 and 72 cents, mills will continue to flock to the U.S. for cotton. U.S. cooperatives and merchants are aggressively offering strong basis bids to potential mills, and that has encouraged excellent sales. It is a far more economical trade for mills versus other cottons. Mills can take advantage of the basis offers, buy On-Call and fix prices at a later date.
Granted, mills have not been very astute at fixing the price the past two years, but possibly they will begin to finally pay attention this season. In that regard, mill on-call sales have increased almost every week during the 2017-18 marketing year – an excellent indication of improving demand. As stated last week, demand moves markets, and cotton demand has resurfaced.
USDA raised its estimate of world cotton demand 1.3 million bales over last month’s estimate, and it is now up to 119.3 million bales – more than 5.0 million bales more than last year. Being redundant, demand moves markets, and the demand for cotton will continue to grow.
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