Cotton futures traded up on seasonably thin volume on Friday as the new USDA crop report was digested. Prices for the Dec 08 contract reached 74.75 before settling to 73.59 at close of session while the near month contracts closed above 70 for the first time this month. This price level is over 9% above the same period last year.
The USDA report estimates US Crop will be3.4% smaller that estimated due to dry weather in TX, leaving total production at 14 million bales for the September harvest versus the 14.5 million June forecast and well below last year's 19.2 million. This downturn in US production was largely anticipated due to rotation away from cotton to higher priced commodities like wheat and Soy Beans.
With bad weather conditions in the Punjab Cotton belt having a similar impact on Indian estimates, total global is now estimated at 119.9 million bales for this marketing year with global consumption anticipated at 124.3 million.
The big dilemma here is how to interpret data from China, the world's largest grower. The USDA has left the predicted production there at 35.5 million and has actually dropped estimates of Chinese imports by a million bales.
Consider this: according to a report filed on 7/10 by the Chinese Office of State Flood control and Drought Relief, 13% of total Chinese farmland was impacted by natural disasters in the first half on 2008 including early spring blizzards, flooding in the south, drought in the north and west (potentially exacerbated in some regions by water re-directed to Beijing for the Olympics) not to mention the Sichuan earthquake.
In the cotton producing region of Xinjiang alone, drought has affected over 750,000 hectares, of which 300,000 are expected to see yields drop by more than 30% while close to 100,000 hectares more will lose more than 70%.
If we were to receive any supply surprises from China post-Olympics as we move into the harvest season, the cotton market seems set to be caught with its pants down.