'Bearish' cotton price consensus 'offers opportunity'

14.06.2017

Prospects for cotton prices may not be as downbeat as some commentators believe, analyst Judith Ganes-Chase said – despite acknowledging that this year US harvest could exceed official forecasts.

Ms Ganes-Chase acknowledged the pressures on cotton prices from raised production forecasts for 2017-18, with the US Department of Agriculture on Friday raising its estimate for the world harvest by 1.5m bales to 114.7m bales – a jump in output of 8.7m bales year on year.

"The season ahead will start off with a bearish posture given the potential for increased plantings in response to better prices" that have reigned for much of 2017.

US farmers, expected by the USDA to raise output by 2.0m bales to a 10-year high of 19.2m bales this year, "are not the only ones with intent to plant more cotton and increase production," said Ms Ganes-Chase, head of J Ganes Consulting.

Other major growers, such as China, Pakistan and India, where monsoon rains have got off to a good start, are also seen raising output.

And the US harvest could well exceed official expectations, she said.

"USDA may have understated the size of the US cotton crop if weather stays favourable as the figures were based on average abandonment and yields," and both results could turn out better than expected.

'Sing a different tune'

However, investors, who on Tuesday drove New York cotton futures to their lowest since January, are "considering the worst-case posture", Ms Ganes-Chase said.

"The market is pricing in a fairly bearish perspective and with that comes opportunity."

Although concurring with ideas that cotton prices may yet fall, flagging in particular the pressure on values as harvests boost world supplies, "thereafter, I would sing a different tune and moderate bearish views".

'Fundamentals ess bearish'

Indeed, cotton supply and demand fundamentals are "actually less bearish than they were in March", when the USDA underlined expectations of a rise in US cotton sowings this year, forecasting a rise of 1.16m acres to 12.23m acres in plantings.

The US balance sheet at the time included an expectation of a rise in US cotton inventories over 2016-17 which is no longer expected, thanks to strong exports.

US inventories are now forecast falling by 600,000 bales this season to 3.2m bales.

'Now, with [2016-17] ending stocks slashed, the increase in supply [in 2917-18] won't seem as monumental."

Furthermore, the USDA may have proven too hasty last week in cutting by 500,000 bales, to 13.5m bales, its forecast for US exports in 2017-18.

"If the quality of the 2017 crop is excellent, then exports will likely exceed the current view as well preventing a large stock build," Ms Ganes-Chase said, terming the USDA export forecast "conservative".

'Multiple sell trigger levels'

Many other commentators have issued cautions over cotton price prospects, with Dr John Robinson, cotton marketing expert at Texas A&M University warning of a "lot of downside price risk" in the market, while Rabobank termed Friday's USDA data "bearish".

Tobin Gorey, at Commonwealth Bank of Australia, on Wednesday restated caution over cotton futures, which closed the last session at four-month lows, for both July delivery and the new crop December contract.

The contracts also came close to falling below their 200-day moving averages, a key technical pointer.

"Cotton futures are ploughing through multiple sell trigger levels very quickly – the consequence of having gone nowhere new for months," said Mr Gorey.

"The forecast fundamentals have been in place for some time for lower prices. Fireworks might still be ahead."

Crop condition overstated?

However, Louis Rose at Rose Commodity Group has taken a more mixed view of the USDA data, underlining that they show growth in consumption as well as production.

Furthermore, he flagged some caution over a USDA assessment, in weekly data on Monday, that 66% of the US cotton crop is in "good" or "excellent" condition.

"Crop condition ratings continue to seem higher than reports we receive from people with 'boots on the ground' across major US producing regions," Mr Rose said.

"One of our Texas contacts relays that loss of non-irrigated acreage that has been planted, but has yet to emerge, could be significant."


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