Global cotton (NYBOT:CTV13) output is expected to fall by 2.6% from the previous season, to 118 million bales, while consumption is expected to grow by 2.2%, to 110 million bales. Still, the balance sheet for the global cotton market is set to record yet another production/consumption surplus that will be heaped on top of burdensome carryover stocks from the 2012-13 marketing year. Ending stocks are estimated to grow to a record 94.34 million bales, or a staggering 85.9% of usage. That’s up from 79.6% last season and 68.9% in 2011-12.
What’s been keeping the market afloat, and whatever it is, can it last?
The U.S. is the world’s largest exporter of cotton, so there is a heavy focus on the U.S. crop. Planted area was 17% below last year and 30% smaller than in 2011-12. The crop was planted very late because of the very wet spring. Some key growing regions in Texas are now experiencing severe drought that will probably result in a high rate of abandonment that will reach 40% in the Southwest.
Average national yields are expected to suffer, falling to 831 pounds per acre, compared with 887 pounds per acre last year. In the July crop report, the USDA raised its acreage and yield estimates, but also increased its estimate for abandoned acres, leaving the forecast for the crop unchanged from June at 13.5 million bales. That will be the smallest crop since 2009-10. The supply side is not the issue, though. As illustrated above, warehouses are bursting at the seams. Crops in producing nations, other than the U.S., are about the same size as in recent years.
The Indian monsoon has been above average. The USDA raised its estimate for Indian production by 1 million bales from its June estimate, to 28 million bales, or 5.6% higher than last year. The upward revision was possibly a reflection of the successful passing of the critical on-time arrival of the monsoon. The Chinese crop is down 1 million bales from last year, or 2.8%, but that is not very likely to result in increased imports — as explained below. A U.S. crop failure — while, still a possibility — may not mean what it once did.
As with many commodities, Chinese import trends are the key. China’s cotton stocks have ballooned to 59 million bales — having grown from only 10 million bales in 2010-11. The government is rumored to be poised to sell off inventories, and imports are expected to decline. In 2011-12, 54% of U.S. exports went to China, compared with only 42% for the current marketing year.
Chinese imports from all sources peaked in 2011-12 at 24.5 million bales. In 2012-13 that figure fell to 20 million bales, and for the coming season, imports are expected to plummet to only 11 million bales. If China were to unleash its stocks, it would take a full season or perhaps two to see it return as a steady and reliable purchaser.
The flip side is that we do not actually know how large the stockpile is. The only solid information is the study of China’s importing patterns. But as such, we may indeed be at the beginning of a period of greatly reduced Chinese imports.
U.S. shipments for the outgoing 2012-13 marketing year have tapered off over the past four weeks, averaging only 160,000 bales. The July crop report cut the export estimate by 300,000 bales, to 13.3 million bales. But with only three weeks left to the marketing year, exporters would have to ship just under 300,000 bales per week to reach the USDA target, which is unlikely to occur. The USDA will have to cut its estimate again, which will increase the already-exhausting estimates for ending stocks.
We were stopped out of long position at 82.5¢ per pound, basis December, as per our May 8 recommendation. Massive global stockpiles will eventually find their way to the market and will depress prices. Establish short positions in December cotton. Place initial stops at 88¢, basis December, close only.