Will The Boom In US Cotton Exports Continue?

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The April adjustment in the US old crop cotton numbers was decidedly bullish looking, and resulted from one large adjustment. US exports were raised a significant 800,000 bales to reflect the strong recent pace of export sales. There were no adjustments to expected US carry-in, production, mill use, or the "loss" fudge factor category.

USDA's April projections of 2016/17 world cotton supply and demand included a modest net increase (month-over-month) in projected world production, concentrated in China (+250,000 bales), Brazil (+200,000 bales), and several other countries, and partially offset by a reduction in Australia (-100,000 bales). 

World consumption was slightly increased month-over-month, after some mostly offsetting adjustments. The trade categories were adjusted by 150,000 bales, reflecting small adjustments in a number of mainly exporting countries. After a small adjustment to the "loss" fudge factor category, the bottom line was a month-over-month increase in world ending stocks for 2016/17 of 430,000 bales. Such a monthly adjustment would historically be neutral to slightly price-weakening, all other things being equal.

The April adjustment in the US old crop cotton numbers was decidedly bullish looking, and resulted from one large adjustment. US exports were raised a significant 800,000 bales to reflect the strong recent pace of export sales. There were no adjustments to expected US carry-in, production, mill use, or the "loss" fudge factor category.

Anticipated by market

So, the bottom line was a month-over-month 800,000 bale decrease in projected US ending stocks, to 3.7 million bales. Such monthly adjustments would ordinarily have a positive price response, according to theory and history. As it was, the market apparently anticipated this old crop export adjustment by the higher prices seen in March (and the lack of post-report price response).

The most relevant aspect of the adjustment in US cotton numbers is in shaping the supply forecast for the new crop balance sheet. Let's assume USDA's March 31 planting forecast of 12.2 million acres of all cotton. If you take USDA's tentative (February) projections of 13% abandonment and 816 pounds per acre yield, you get a conservative estimate of 18 million bales of production. (It is not hard to shave the abandonment percentage, raise yield 40 pounds, and get a 19 million bale crop.)  Combining new crop production with the carry-in of 3.7 million gives a healthy supply of 21.7 million bales.

What about exports?

Domestic mill use is expected to remain under 3.5 million. The real wild card is US exports for the new crop market. The old crop market has been driven by a boom in US exports. This is reflected by a seven-month uptrend in both price and export sales, representing an expansion of the demand relationship. Most of this expansion can be attributed to the particularly good, and widespread, quality of the 2016 US crop.  

Will this effect continue at this high level? To the extent that the greater export demand for US cotton depends on the US actually having the biggest supply of quality cotton in a given year, it remains to be seen whether the US will retain this larger market share. We don't know what the quality of the 2017 crop will be.

However, market share may be influenced by more longer-lasting things, like the reputation of the sourcing country, and the expanded relationships between suppliers and buyers. Perhaps then there will be positive spillover into the new crop marketing year that is somewhat independent of the specific quality of 2017 US cotton supplies.  

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