If the majority of traders believed the USDA numbers were close to being right, then prices today would be 95c, +/-. Our deduction is that the “real” carryout is 3.5 Mb to 4.0 Mb. Now, on to the hard numbers. The cut in old crop exports of 300 kb was dead on, considering the late season collapse in shipments.
Demand has been good the entire year until May. The crop production of 13.5 Mb is too low for now, unless one can see forward to early Aug and take another huge bite out of the Texas crop. That could happen, but its 3 weeks too early to knock that cotton off for sure. As for the 11.0 Mb new crop export number, we think that looks ¼ Mb to ½ Mb too high, but for now its hard to argue. The bottom line is that the carryout is about 1 Mb higher, until and unless Mother Nature denies the Llano Estacado for the 3rd year in a row.
As for world numbers, the 1 Mb increase in India’s crop was expected, and was most of the reason for end stocks to grow 900 kb. Other changes were insignificant.
Varner View
Every time the USDA report comes out we sit back and shake our heads over the world end stocks number. The magnitude of this number is too gruesome to imagine what the market would have to do to account for such a record-shattering inventory. This is a record for all times and all crops, as there has never been such an event. One wonders if the Chinese may resort to an acreage restriction program much like the old US loan, whereby in order to use the loan a farmer had to adhere to strict acreage controls. That’s about the only way they can get out of this mess without blowing up the market. And even that would take a few years. As for trading, we leaned into this rally for some farmer hedges, and actually sold a few futures for a small spec short with Dec between 8650 to 8700. We’ll see what happens.
Technicals
Seasonal trend is negative into mid Aug. Our idea that Dec was in a B leg of an A-B-C rally looks a little more credible today, but we have more confidence in the seasonal than our chart interpretation. The market did fail today so we will go out on a limb and say that this B leg rally is in, and now the C leg down is underway. That pattern agrees with the seasonal, and will be our preference until and unless Dec can get above today’s high.
