COTTONSEED MARKET: Focus may be shifting slightly from a supply-dominated bearish outlook to a more balanced view of cottonseed fundamentals that accounts for the possibility of weaker demand. Specifically, the dairy industry has appeared less stable during September. Dairy margins have deteriorated for deferred delivery periods. Whereas in August dairies had been expected to enjoy modest but steadily positive margins through at least the beginning of 2018, a combination of the rising likelihood of domestic oversupply and falling international milk prices threatens to unseat those forecasts. Weaker dairies margins in the US imply lower cottonseed demand as managers curtail herd development and postpone expansion.
The effect on cottonseed meal would be similar to cottonseed’s, but the impact to cottonseed oil so far seems limited. While demand remains modest for cottonseed oil, crushers are reportedly unconcerned by the possibility of quality problems from Hurricanes Harvey and Irma. Their market activity has remained steady, albeit low, during the storm-dominated news cycle.
Aside from the heavy new-crop cottonseed supplies expected in the next several weeks, bearish cottonseed traders could cite deflationary outlooks in corn and soybean markets as contributors to lower cottonseed prices. The Environmental Protection Agency opened for public comment downward adjustments to fuel volume requirements. If affected, such changes could increase the domestic supply and decrease the price of soybean oil and other cottonseed oil competitors.
Additional pressure comes from recently improving Brazilian weather conditions, which had been exhibiting a dry bias. Domestically, US farmers are unofficially reporting better-than-expected yields from the Corn Belt, potentially portending bearish moves. The fact that corn harvest is roughly a week behind the norm is likely a benefit to ultimate production as it gives the crop a longer maturation period, which could reinforce the bearish corn price outlook. Informa Economics IEG has raised its forecast 2017/18 average farm price for corn to $3.35 per bushel, a 15-cent discount to its forecast futures value. Informa projects an average soybean 2017/18 farm price between $8.50 and $9.50 per bushel given soybeans’ expected stocks-to-use ratio. Particularly give Brazil’s soybean export values are falling closer to the US’s, South American production prospects and US export pace will likely remain features for the trader throughout the year.
USDA’s quarterly Grain Stocks report was released Friday, September 29, reflecting lower-than-expected stocks of corn and soybeans. Corn stocks were estimated at 2,295 million bushels, 58million bushels lower than the average market expectation. Soybean stocks were estimated at 301 million bushes, 37 million bushels below expectations on a 40,000-acre decrease to area and a slight decrease to yield. At 4,296 million bushels, the crop is still a record. The stocks figures resulted in muted price reactions given that end-of-month and end-of-quarter position adjustments would likely have supported the firmer price action. One suppressive feature to the corn market is that the lower stocks figure still represents the largest quantity since 1988. In all, cottonseed faces a number of bearish forces with support coming largely from the multi-year affordability of new-crop cottonseed.
COTTONSEED BALANCE SHEET: From August to September, USDA increased 2017/18 production projections by 389,000 tons. The majority of this increase – 225,000 tons – went to feed, seed, and residual, which USDA now projects at 3.950 million tons. In the two weeks since the September 14 report was released, the deterioration in dairy prices may have pushed some tonnage from feed usage to crush and exports. That possibility prompted Informa to raise feed, seed, and residual by a more modest 195,000 tons month over month. The remaining 30,000 tons in Informa’s balance sheets were split between crush and exports, with the majority going to crush.
Informa’s export forecast at 465,000 tons is 105,000 tons above USDA’s. Admittedly, export demand has been reported as soft so far this year, though that is expected to change as the full pressure of ginning season weighs on the market. Cheaper domestic cottonseed prices are expected to quicken the pace of exports. Now at 2.325 million tons, Informa’s crush projection was raised 125,000 tons compared to its August figure, an increase 25,000 tons greater than USDA’s.
USDA increased 2017/18 ending stocks projections by 61,000 tons to 557,000 tons, slightly above Informa’s forecast. Informa’s 2016/17 carryout remains significantly higher – by 66,000 tons – than USDA’s because Informa believes USDA may not be fully accounting for the seed quality problems in Texas.
Large cotton acreage and overall favorable growing conditions remain the largest feature to the cottonseed price outlook. As of writing, 17 percent of the cotton crop has been harvested and 67 percent of the bolls have opened. As with corn, a longer closed-boll period could benefit production by allowing more time for maturation. End-of-crop yield risk is not overlarge as harvest is ahead of the pace of any of the past five years. At roughly 11.5 million acres and 21.758 million bales, the US will likely be flush with cottonseed..
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For weekly cottonseed pricing and commentary contact:
Grady Ferguson 901-202-4443 firstname.lastname@example.org