The first benchmark of actual field-sampled cotton production came in the August USDA report. The August report did three things that tightened up the picture for prospective U.S. production.
First, the August report revised the cotton plantings number downward slightly, from 9 million to 8.9 million acres. More significantly, USDA raised expected abandonment from 5.5 percent (in the July report) to 11.3 percent in the August WASDE. That means USDA moved from assuming historically low abandonment to a more normal average abandonment.
Third, USDA’s forecasted average yield, based on field sampling, was 795 pounds per acre, down from 819 pounds per acre in July. Month over month, the effect of a lower yield from fewer harvested acres from slightly reduced plantings multiplies out to an unexpectedly low 13.08 million acres of new crop U.S. cotton production. That projection is down 1.5 million bales from the July projection, a fairly large downward revision.
Having fewer new crop bales suggests fewer exports, which USDA reflected by an 800,000-bale cut in forecasted exports, month over month. With some other minor tinkering, the bottom line was a forecast of 2015/16 ending stocks at 3.10 million bales, which is historically tight and over one million bales smaller than the July forecast.
The expected market response to such an adjustment would be price supportive, and ICE futures did not disappoint. Dec. ’15 cotton traded up over 4 percent on the day of the report’s release, with no outside support from lower grain and oilseed futures, and with falling stock prices as well.
Some of the initial strength in cotton futures likely involved covering recent short positioning by hedge funds. The market reaction appeared to regain roughly a third of the six-cent slide that began July 2 and had seen four days of prior settlements below 62 cents per pound. Perhaps this will simply leave the market back squarely in the 62- to 68-cent range that it has been in for ten months.
Some big uncertainties remain to play out between the small and late aspects of this crop and the weather. The squares and bolls that USDA observed in August will need moisture in August and sunny, dry maturation weather September and October. Whether the West Texas crop will get timely August moisture is anybody’s guess.
Meanwhile, an ongoing forecast for strong El Niño conditions has the implication for wetter, cooler weather during the fall and winter. If this translates into a cool, misty “deer hunting weather” in the early fall, that could erode cotton yield potential, in addition to degrading quality. That possibility could lead to further whittling away at USDA’s production estimate and help support futures in the upper 60s. In addition, a very strong harvest-time basis for those growers who can supply quality fiber for the export market could develop.