Cotton's rally stalls, as investors await estimates of Harvey damage

29.08.2017

Cotton's rally stalled as investors awaited assessments of damage to the US crop from Hurricane Harvey, which has also raised concerns over wheat exports and beef production too.

The US National Hurricane Centre cautioned that Harvey, while now downgraded to a Tropical Storm, would continue on Monday to dump "heavy rainfall" and "worsen the flood situation in south eastern Texas and south western Louisiana".

This after the storm, billed the strongest to hit the US since 2004, had already dumped nearly 40 inches of rain on some parts of Texas, causing what state governor Greg Abbot termed "of the largest disasters America has ever faced".

With Texas the top grower of cotton, and besides the top beef-producing state, agricultural investor reaction has focused in particular on these two commodities, with New York cotton futures for December in the last session jumping 2.6% to 69.89 cents a pound.

However, in early deals on Tuesday, the contract added only a further 0.1% to 69.89 cents a pound, struggling to approach the psychologically-important 70 cents-a-pound mark with uncertainty over how much damage the storm has caused so far, and worries over how much further harm will be done.

 "Hurricane Harvey is still keeping the agricultural markets on tenterhooks," said Commerzbank.

'Little to no damage'

In fact, some early assessments have shown damage overall as limited, with the US Department of Agriculture overnight actually raising by 3 points, to 58%, its estimate of the proportion of cotton rated "good" or "excellent" in Texas - which accounts for roughly half of US production.

Several producers in the Coastal Bend, a storm hotspot, "completed cotton harvested prior to the arrival of hurricane Harvey," USDA officials said.

They estimated the Texas cotton harvest overall at 12% complete, up 3 points week on week and ahead of the average figure of 5% for this time of year.

"Cotton modules in the Coastal Bend received little to no damage from the hurricane," said the USDA briefing, for the week to Sunday.

'Limited futures price impact'

The report added that over the weekend, Harvey "left between 8 and 20 inches of rain in south east Texas, south central Texas, the Upper Coast, and the Coastal Bend".

"Floods were reported in many of the affected areas."

Separately, Dr John Robinson, cotton marketing expert at Texas A&M University, flagged estimates of "300,000-400,000 bales worth of cotton still on the stalk in the affected region" – a relatively small figure in terms of an overall US crop that the USDA has forecast at 20.6m bales.

"The loss of 300,000 bales does not translate to more than a penny or so impact on the base price, ie, the futures price," Mr Robinson said, advising growers to be "ready" to buy into rallies.

Quality premiums to rise?

However, he did flag the potential for a bigger impact on cash market differentials, "with higher premiums being offered for scarcer good quality cotton for the next couple of months".

And there was considerable comment in the market for the Harvey to cause further damage yet, including in areas further east in the US cotton belt.

"Over the next few days, continuing heavy rainfall could cause further damage as it moves further into the region around the Mississippi Delta," Commerzbank said.

Ahead of the USDA crop progress report the Plains Cotton Cooperatives Association said that ",arket participants also will be watching… closely for [data] on open bolls in Louisiana and Mississippi, which likely will receive heavy rain from Harvey's remnants".

The report showed boll opening at 53% in Louisiana and 23% in Mississippi.

'Could approach 80 cents a pound'

At Commonwealth Bank of Australia, Tobin Gorey, said that Harvey's "final impact on crops is potentially large but that depends on the storm staying on that course.

"Harvest has, so far, has been like a 3am drunk, teetering in their stupor one way then another.

"The market for now is still in state of not wanting to be short which helps prices.

"Should Harvey do major damage to cotton crops though we would expect prices to rise by much more, at least briefly closer to 80 cents a pound than 70 cents a pound."

 'Flooded pastureland'

In the cattle market, meanwhile, the storm has been viewed with fuelling price gains after the USDA, later on Friday, showed US feedlots in July taking in 1.615m head of cattle for fattening.

While the figure was up 2.7% year on year, it fell short of the 1.67m head that investors had expected.

"Livestock prices have also picked up in recent days, as a lot of the pastureland in the leading US beef-producing state is flooded and its fencing damaged," said Commerzbank.

Best-traded October live cattle futures closed up 1.4% at 108.375 cents a pound in Chicago on Monday.


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