August 12, 2022
WASDE Production Forecasts 12.57 Million Bales
Cotton futures made a fairly steady march higher, with their largest gain on Thursday when December futures rallied to limit up mid-day. The consistent movement higher left last Friday’s low of 94.22 cents per pound as the week’s low and Thursday’s high at 104.94 cents as the week’s high. December futures settled at 104.59, up 997 points for the week, which is actually the best five-day gain in the life of the December ’22 contract. Trading volumes were also their highest in a month as traders appear to feel more safe re-entering the futures market. Despite the higher volume and movement higher, aggregate open interest was down just eight contracts for the week at 188,078.
We don’t usually mention Friday’s price action as we try to get our letter out during the day on Friday, but having held back in order to cover the WASDE Report today, we think it is important for readers to know that the market surged higher on the release of the bullish WASDE (see below) settling at limit up on Friday at 108.59, now 26 cents off of the July 15 low.
Wednesday’s CPI data was the big news in the broader markets this week. With the stock market having fought off of its lows fairly significantly, investors are looking for reasons to jump back into risk assets like stocks and commodities. For the most part, that means most investors are looking for any indication the Federal Reserve could alter its current hawkish intention to continue raising rates, which would require some indication price growth is cooling. The headline CPI figure did not disappoint, coming in at 0.0% change month-over-month. Markets rallied sharply on the news, but a closer look tempers the enthusiasm. While the CPI was flat month-over-month, year-over-year inflation was still up 8.5%. Even more alarming, most of the index’s price decline was in energy costs as gasoline prices fell, but the majority of other index components continued to rise. The All-Items-Less-Energy index was up 0.4% month-over-month, but the headline figures still have broader markets in more of a “Risk On” mood.
From a purely cotton point-of-view, the WASDE Report was this week’s main event as cotton traders of all stripes waited to see how the USDA would address shifts in global consumption and the unhealthy U.S. crop. While global carry-in increased 680,000 bales to 84.72 million and global consumption fell 830,000 bales to 119.09 million, the U.S. production estimate really grabbed all the headlines. The USDA made history with the largest-ever August cut to the U.S. production forecast, cutting 2.93 million bales to bring the U.S. total production forecast to just 12.57 million bales. NASS’s first Crop Production Report of the season shed more light on the cut, most of which could be ascribed to Texas where the USDA expects just 2.2 million acres to be harvested. Projected production in the state is just 2.9 million bales versus 7.7 million last year and 3.5 million bales in 2011. With 100,000 bales more imports, 200,000 bales less of U.S. consumption, and 2 million bales less of U.S. exports, ending stocks are predicted to be just 1.8 million bales.
This week’s Export Sales Report showed the activity for the first week of the 2022/2023 marketing year. Net new sales for the first four days of the marketing year were 102,400 bales of upland and 100 bales of Pima. Unshipped sales that were carried over from the 2021/2022 marketing year totaled 2.39 million bales of Upland and 30,400 bales of Pima. Combined with sales already on the books for the 2022/2023 crop year, Upland export commitments stand at 7.14 million Upland bales and 94,600 bales of Pima. Given the USDA’s 12.57 million bale crop expectation, we are starting with roughly 59% of the crop already committed to the export market, and net new sales have to average just 110,000 bales per week to hit the USDA target with a reasonable allowance for carryover sales.
The Week Ahead
Once the market has really processed this week’s WASDE report, it is likely that broader macroeconomic concerns will take over again. Notwithstanding a potential tropical storm headed toward South Texas, today’s crop report cleared out the production concern that the market was carrying, so focus is likely to turn toward demand gauges via the weekly export sales reports and macroeconomic indicators going forward.
In the Week Ahead: