The October USDA crop report for cotton was a bear’s fantasy. The forecast for global 2012-13 output was revised up by 2.3 million bales, while consumption was lowered by 680,000 bales from the September estimate. Crop estimates for just about all major producers – including the world’s four largest, China, India, the U.S. and Pakistan – were raised. The net effect was an increase in the estimate for ending stocks to 79.11 million bales, 2.6 million bales above the already-record-high ending stocks estimate reported in September. Ending stocks as a percentage of consumption will jump to 74%, up from the September estimate of 71.1%. That compares with 67.4% at the end of 2011-12. That would be the highest inventory level of any major internationally-traded commodity that we know of – this year or any other year.
This, of course, explains why cotton prices have fallen from the $2.15-per-pound peak set in early 2011 (Chart 1). Are we headed down even further, back to the 2009 lows?
The first matter that requires explanation, though, is why, after selling off on Oct. 11 immediately after the release of the USDA report, the market rallied from 70¢ per pound to close to 80¢ per pound over the following few sessions, if the market is in fact as bearish as the global balance sheet implies.