US COTTON production in the 2018-19 season is a major swing factor for the cotton market as the crop matures over coming months.
Prices have remained elevated following the July close, and – with export commitments outpacing 2017-18 – eyes are on the crop to gauge whether supply can keep up with the pace of demand.
As such, the crop report in the USDA’s August World Agricultural Supply and Demand Estimates was keenly awaited.
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Having surprised trade in July with a reduction to 18.5 million bales, the USDA has U-turned and unexpectedly lifted US production to 19.2 million bales.
Consensus appears to be consistent on poor conditions in Texas.
Texas produced 44 per cent of the cotton crop in the 2017-18 season and has faced extreme dry conditions that will likely see high abandonment of the crop in that state.
The USDA has forecast a 30 per cent decline in Texas production in the coming season.
Outside of Texas however, the eastern regions have had a strong growing season and yields are looking impressive – the key driver behind the lift in production.
It should be noted though that there is still plenty of time remaining before pick and weather risk may threaten this increased production.
The key importance of the US crop size for the global market is its direct impact on the amount of cotton available for export.
While a 19.2 million bale crop would allow for 15.5 million bales of exports without diminishing stocks in the US to below-average levels, the prospects of production sub-18 million bales would definitely squeeze available cotton relative to current commitments –providing an upside risk to the current price level trading in the mid US80 cents a pound range.
Putting this export demand in context, the USDA just reported that US cotton exports in the 2017-18 season (August-July) are estimated at the highest level since 2005-06 and the second highest level on record.
As we turn to 2018-19, with global consumption growth at four per cent and set to reach a record high, the availability of US cotton is an important component feeding the current appetite for cotton.
While uncertainty over US production is one unknown element in the current market that could provide further upside to prices, so too is the potential lift in Chinese import demand through the season.
Already there is an indication that there will be further Chinese import licences granted in the months ahead.
Rabobank forecasts Chinese imports to lift over 6.5 million bales in the coming season.
While US production and Chinese import demand both provide upside risks for cotton prices, the deteriorating trade relationship between the US and China is certainly a factor to watch, as is the lack of price improvement in cotton yarn prices – both factors which could curtail consumption to levels lower than currently forecast.