While cotton futures have remained very active the past few months, the wide 65-75 cent trading range seems to have dictated for nearly three months. Also, most of the trading has been limited to the narrower six cent 67-73 cent range. Recall, there were some limit trading days during July. Yet, when everything was said and done, the December contract gained a whopping one point, yes, just one (1) point during the entire month of July.
While I have, on several occasions, voiced my thought that the market would break out to the top side of the range, such has not been the case. One week from today, Friday, August 10, USDA will release its August supply demand report, and that report may well set the stage for the beginnings of a new trading range. U.S. export sales and shipments have remained strong, world apparel sales are increasing and expectations are that U.S. carryover stocks will be lowered in the USDA report. It is expected that USDA will increase U.S. exports to 11.8-11.9 million bales, up some 200,000 to 300,000 bales above last month’s estimate of 11.6 million. Such an increase would reduce the 2011-12 carryover from 3.3 million bales to 3.0-3.1 million.
The August USDA report will represent the first objective yield survey of the year. All other forecasts to date have been subjective estimates. USDA crop enumerators were in the fields at mid-week and have completed their survey. The results will be tabulated at the individual state level and sent to Washington early next week for final tabulation. The current forecast is 17 million bales, but many expect the year’s first objective forecast will be about 16.6 million bales. Thus, the 2012-13 U.S. carryover, currently estimated at 4.8 million bales, could drop as low as 4.2 million bales, a level that would be very supportive of higher prices. Nearly all estimates from analysts fall between 15.5 and 17.5 million bales.
More importantly, the price side of the cotton equation is looking for help from demand factors. With consecutive reports now favoring both housing starts and apparel sales, U.S. consumers are beginning to come back to cotton. Gap, Limited, Ross and other firms reported strong sales over prior quarter sales. Some firms reported double digit gains over the prior quarter (Gap-10%; Limited-12%). While that is an important step, those same consumers must now dictate to retailers that they favor 100 percent cotton and cotton-rich goods.
USDA lowered its forecast of the 2012 Indian crop by one million bales in its July report, down to 24 million bales. Most feel strongly that at least another million bale reduction is due this month. Some suggest the Indian crop should be lowered to 22 million bales, but that is likely too much to bite off at one time.
The combination of improved housing starts, increased corporate profits from apparel retailers and the prospects for declining crops in India and the U.S. should point to a higher price range. Let’s not get too anxious, as world stocks will continue to hover near record levels for another two to three months, but the actors are lining up are for an exciting debut of the 2012 harvest season.