COTTONSEED MARKET: Through a month of slowing price declines, the market stabilized as the massive month-over-month and year-over-year discounts reached in October sunk into the minds of market participants. Despite the historically low prices being traded currently, there could be additional declines in the months ahead as the trade becomes more aware of the limits to quantities demanded at current price levels. In short, the feeding sector may not be willing to absorb the entirety of this year’s very large cottonseed supply unless slightly further declines to prices are reached.
The main factors affecting the price outlook are USDA’s overestimation of future crushing volumes, constraints on end-user demand from tighter truck logistics, and the high head counts across all major livestock and poultry species. The first two factors have a suppressive effect on the price outlook, while the final factor has a supportive effect.
COTTONSEED BALANCE SHEET:
USDA’s ERS maintained its 2.400-million-ton crush projection in its latest monthly supply and demand report. This, however, is at odds with NASS’ estimate of monthly crushing volumes so far this marketing year. Adding to the skepticism that cottonseed crushers still possess the ability to rival their 2012/13 crush at 2.550 million tons, the slower-than-expected pace of crush this marketing year may suggest that crushers are even lagging their now-lower crush capacity estimates.
On December 1, NASS released its estimate for October cottonseed crush volumes, which totaled a moderate 158,687 tons. This is 12 percent (17,000 tons) above the same month a year prior and eight percent (12,000 tons) above the five-year October average. Higher-than-normal crush volumes are necessary because of this year’s large crop, estimated by USDA at 6.758 million tons and by Informa Economics IEG at 6.800 million tons. By either organization’s estimate, it would be the highest production since 2006/07, the fifth largest output on record at 7.348 million tons.
October’s crush may not be strong enough to compensate for the weaker-than-normal September volume, estimated at 110,881 tons. While September featured the firm prices of the pre-ginning period, October’s crusher purchases involved the precipitous drop across many geographies and should have allowed a major boost in crushing margins. The fact that this failed to result in crush volumes at 175,000 tons or greater may suggest either that total crush capacity has fallen since 2012/13 more than was believed or that crushers are not fully incentivized to process near capacity for other reasons. The former would be meaningful to total usage forecasts and would likely suggest higher carryout projections. The latter could be caused by operational difficulties such as bringing formerly idled plants back online, a situation that could suggest improved efficiency – and crushing volumes – during the rest of the year. Even in the latter situation, however, the volumes lost to crush solely during October could still dent 2017/18 crush projections.
Truck logistics problems resulting from the implementation of Department of Transportation’s electronic logging devices (ELDs) could pose another hurdle for the capturing of all of cottonseed’s latent demand. Available demand may fall short of latent demand because purchasers will likely have a more difficult time receiving cottonseed loads because operating hours are limited by ELDs. It is estimated that ELDs could reduce truck availability by five to 10 percent, though some market participants have offered projections relating to their local markets as high as 15 to 20 percent. While Informa analysts lean toward the lighter curtailments, even a five-percent reduction in truck availability could have meaningful price impacts. Lost sales to feeders one week are not likely to be made up the next week, nor are they likely to be added to the end of the year. This flagging short-term demand could mean greater supplies are carried later into the year, causing an increase in likelihood of price weakness during the typical firming period of the year’s first half. In this scenario, should holders of cottonseed not start unloading product during the first half of 2018, the downside risk to prices during the period immediately preceding 2018/19 ginning grows substantially.
One supportive feature to the cottonseed market is the robust growth seen recently in livestock and poultry markets. While not all of these markets are directly accessible to cottonseed, they are all outlets for feed grains and feed ingredients that provide a solid demand base for whole and processed cottonseed as well as corn and soybean meal.
Record-setting red meat and poultry production levels in 2017 may still allow for higher production levels in 2018, continuing to support feed demand. Levels in 2017 are projected to exceed 2016 levels by 2.7 percent. Across all species, the strong production does not yet appear to have burdened the market enough to significantly temper feed demand growth.
In balance, the bias of the price outlook is still decidedly to the downside. Despite already low prices by historical standards, the size of this year’s cottonseed production combined with a low-price environment for competing feed ingredients is unlikely to sustain cottonseed rallies and could lead to further declines in the months ahead.
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For weekly cottonseed pricing and commentary contact:
Grady Ferguson 901-202-4443 firstname.lastname@example.org