Market Comments – August 24, 2017

NY futures rallied on weather fears this week, as December gained 292 points to close at 69.83 cents.
Hurricane Harvey brought some life into the cotton market this week, as it is threatening the cotton crops in South Texas and the Delta. Just when it looked like the bears had the upper hand after the WASDE report, Harvey is reminding traders that this potentially large US crop is not quite made yet. 
The way things look at the moment (Thursday afternoon), Hurricane Harvey is expected to make landfall somewhere near Corpus Christi, then twirl around for a day or two, before moving out to sea again and then hitting the coast for a second time somewhere near the Texas/Louisiana border. 
The problem with this tropical system is not so much its strength, but that it is a slow mover. This means that it will pump a lot of rain inland, with some of the models expecting accumulations of up to 25 inches. 
Fortunately a lot of the South Texas cotton crop has already been harvested! Out of an estimated 2.1 million bales production around 1.2 million bales have been picked, which leaves less than a million bales exposed. The remaining acres could suffer losses of 0.4-0.5 million bales if Harvey follows its predicted path.
In the big scheme of things this setback would not alter the overall supply/demand picture by much. However, traders are not just worried about South Texas, but are also concerned about what Harvey might do the Delta. Cotton fields in the states along the Mississippi river are just beginning to open and don’t need another dousing after many areas have already seen around 50 inches of rain since the beginning of May. 
Then there is the long-range weather forecast, which calls for much cooler than normal temperatures and above average precipitation in West Texas and the Delta over the next six weeks. That’s not what these crops need right now! In order to bring these potentially huge crops home, we need a warm September and open skies. That’s why traders are on edge and will continue to be so for the next two months! 
US export sales did not disappoint this morning, as the lower prices of last week enticed mills to buy 335,300 running bales net, with 16 markets participating. Shipments were quite decent at 222,800 running bales considering that open EWR receipts currently amount to just 1.32 million bales. In other words, there is not much cotton available from which to select these shipments. 
Total commitments for the season have now reached 6.8 million statistical bales, of which 0.6 million bales have so far been exported. For the 2018/19-season we already have 0.65 million statistical bales on the books.
So where do we go from here? The US crop certainly has tremendous potential, with some early dryland yields coming it at over 3 bales/acre and with plants generally looking healthy and loaded up across the cotton belt. Judging by field reports we feel that this crop might break yield records and come in at over 21 million bales. 
However, for this to happen the weather needs to cooperate. The crop is late in many places and short on heat units, which means that it will be a race against the clock to reach full maturity. Growers hope for an ‘Indian Summer’, but it looks more like an early fall at the moment and the long-range forecast is not encouraging. The US crop is facing more tropical weather, unwelcome rain, colder than normal temps and potentially an early freeze over the next two months. 
Depending on how it all plays out, this crop could end up somewhere between a record-yielding 21.5 million bales or a disappointing 18.0 million bales. But it is not only the size of the crop that matters, but its fiber quality as well. With hardly any old crop high grades left, with South Texas not bringing as many new ones as expected due to Harvey and with the rest of the crop being late, it will take a while before the pipeline is flush with high grades again. 
We therefore feel that the September to November period will face a shortage of high grades and for this reason we remain bullish on December versus March and later deliveries. Given the current situation we can’t see how shippers can afford to ‘waste’ any high grades to the board in November. 
For now we go with a trading range of 67-72 cents, but the weather needs to be closely watched. Regardless of the crop size, we feel that December is going to maintain a premium over March. 


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