Shurley: Pulling the Trigger on the 2018 Crop
When deer hunting, I am often guilty of waiting and waiting and waiting on something better – often even turning down the opportunity to take a doe, in hopes that something bigger comes along. I too often end up waiting too long, and all the deer just disappear and I don’t even get a doe – nothing for the freezer.
So, how long do you wait? I’m not talking about deer. I’m talking about pricing or taking some form of risk protection. How long? At what point do you say “that’s good enough?” All we know for sure is that producing the crop ultimately commits you to also sell the crop.
I try to never get caught pretending I know where prices are headed, because I don’t, and frankly, no one else does either. All any observer can do is try to analyze the supply/demand fundamentals as best you can and talk about what could or couldn’t happen depending on any number of possible scenarios – to gauge the market in terms of its risk and potential to go up or down from any given point in time.
New crop December futures has pushed above 78 cents. Are we headed higher or will prices decline? Let’s look at what we think we know at this point.
Plantings. Cotton acres will be up. The market knows this, we all know this. Yet, here we stand at over 78 cents. The National Cotton Council projected 13.1 million acres. Then, at the USDA Outlook Forum, the figure tossed out was 13.3 million. USDA’s Prospective Planting report in a couple of weeks could be 13.5 million or higher.
So how much higher do we go before the market decides to pay attention to plantings? So far, it hasn’t. Why is that? Read on.
U.S. and World Production. The 2017 crop is currently pegged at 21 million bales – but we’re coming off a year with a record yield of almost 900 lbs per acre. The Outlook Forum projected a 2018 crop of only 19.5 million bales – 7% below last year on 11.3 million acres harvested. This equates to a yield of about 825 lbs and abandonment of 15%.
The 5-year average yield (836 lbs/acre) and abandonment (13%) would give a crop of 20.1 million bales – or essentially the same as last year. The Texas situation bears watching. The High Plains area is dry, and the outlook is for continued dry conditions through the summer. In summary, despite increased acres, U.S. production could be similar to last year.
USDA is currently projecting foreign production to be down for 2018, with lower production coming in India, China, Brazil, Australia and Turkey.
Growing Demand. World cotton use is growing. This is a reason to be excited, but I want to be cautiously so. In February, USDA lowered the 2017 crop year projection for the first time, but then raised it again for March.
If U.S. and world production should be larger than expected, it would be even more important for use to remain strong. Use is currently projected to increase 5.2% for the 2017 crop year and a slower rate of 1.75% for the 2018 crop year. Most of this increase in expected in China.
Strong Exports. Exports are doing very well and the market takes notice. For the 7-day period ending March 8, MY17 sales total 14.84 million bales. This is slightly over USDA’s projection of 14.8 million bales for the 2017 crop marketing year with 4½ months remaining. Actual shipments have been lagging a bit, however, and we’ll need to keep an eye on that. Shipments for the week ending March 8 were a very good 453,000 bales and have totaled almost 1 million bales for the last two weeks. Shipments need to average roughly 353,000 bales per week for the remainder of the marketing year to meet USDA’s 14.8 projection.
Exports could very well top USDA’s current 14.8 number, and I believe that is now the expectation. If that happens, that reduces the old crop carryover going into the 2018 crop year on August 1. This takes some of the focus off of U.S. plantings. As we progress through planting and summer with the 2018 crop, if we are in fact looking at a 20-21 million bale or less U.S. crop, and if exports and use remain strong, this should be supportive of prices.
China Situation Vastly Improved. Several years ago, China held almost 70 million bales in stocks. This could have been disastrous for prices, but it hasn’t been. That number is now projected to be only 41 million bales going into the 2018 crop year. This reduction has been due to sales from government reserve, reduced area and production, and improved mill use.
USDA is projecting China’s ending stocks to decline to approximately 33½ million bales by the end of the 2018 crop year. This is due to slightly less production in 2018 and use exceeding production by over 14 million bales.
Worth noting, China’s imports are projected to increase from 5.1 million bales this season to 7 million for the 2018 crop year. This enforces what several of us have been saying for a while now – if use remains strong and continues to increase, and unless production ramps up as stocks continue to decline, China will eventually have to increase imports. This also should support prices.
Summary – What Does All This Mean for Prices?
U.S. acres will increase, but production is uncertain for several reasons. If the crop outlook is good, that could eventually have a negative impact on prices…but.
Demand and exports are doing well, and as long as that’s the case, I wouldn’t expect prices to completely fall out of bed.
I wonder if there’s an acreage number that may eventually be big enough to cause the market to retreat from the 78-cent area. What about 13.5 million or higher?
This market (December futures) has targets at three levels – 78 to 80 cents, 74 to 76 cents, and 70 to 72 cents. Some producers have already pulled the trigger on a portion of the crop. The outlook looks good for now, and the market seems to have good fundamental support. Nevertheless, there is downside risk, and producers should consider taking protection at this 78-cent level on a portion of expected production. You don’t want to have to settle for lower targets later on.