COTTONSEED MARKET: During January, cottonseed prices lost the support of the competing feed markets but hardly sunk back to their ginning-season lows. While they traded lower than during the height of feedlots’ late-December scramble for cottonseed, prices have remained steady, largely due to feeders having satisfied their first-quarter needs during late-December. Cottonseed meal markets continue to exhibit marked support even as cottonseed markets remain pressured by the largest estimated production in over ten years.
A significant indicator of the market’s forward price expectations, carry weakened throughout January. Some regions, such as North Carolina, completely lost their carry for a few weeks as near- term demand outweighed storage costs and expectations of the typical usage pace through the rest of the marketing year. Cottonseed delivered to the West Coast is featuring a similar forward curve with Idaho rail values trading nearly flat from January through September. Unfortunately for trading operations, there is an expectation of low price volatility for the next few months. The expectation also reduces the price risk premium that tends to buoy deferred values and stimulate a portion of carry. The dominant features to the cottonseed price outlook are the burdensome 2017/18 production, the revelations of the severity of the multi-year decline in crushing capacity, the underlying support from the feeding industry, and the potential for another cotton bumper crop in 2018/19.
COTTONSEED BALANCE SHEET: The balance-sheet developments during January suggest slightly greater price pressure on cottonseed in the latter half of the marketing year. The greater price pressure stems from an increasing realization that USDA has been overestimating US crush capacity and the potential for another large cotton and cottonseed crop in 2018/19.
In January, USDA’s ERS made a slight 58,000-ton reduction to 2017/18 production estimates, which was not quite outweighed by upward adjustments to usage projections. Informa Economics IEG matched USDA’s downward revision to old-crop production, while both organizations maintained their carryin and import estimates at 399,000 tons and zero tons, respectively. The decrease in estimated production did not meaningfully alter Informa’s price outlook, as Informa’s carryout projections remained the largest since 2010/11. Informa expects cottonseed carryout at 514,000 tons, 90,000 tons above USDA expectation at 424,000 tons. This drives the divergence in the two organizations’ price outlooks. USDA balanced its reductions to production with a 50,000-ton increase in export projections to 450,000 tons and a 100,000-ton decrease in crush projections to 2.300 million tons. While the increase in exports brings USDA very close to Informa’s existing 460,000-ton projection, its decrease to crush does not yet satisfy Informa’s much-lower crush expectation. Informa believes at least 300,000 tons of US crushing capacity has been lost since a 2.500-million-ton crush was achieved in 2012/13, capping 2017/18 crush capacity at 2.100 million tons. USDA would need to lower its crush forecast by an additional 200,000 tons to meet Informa’s projection. Unless the government does this, its feed usage forecasts will remain exaggerated and its carryout projection will remain too low. The consequence will be a government-implied price projection that overestimates traded values.
In its January report, USDA’s NASS released November crushing volumes estimated at 174,179 tons. This is below the pace needed to reach USDA’s 2017/18 crush forecast and caused Informa to further reduce its 2017/18 crush forecast by 100,000 tons to 2.100 million tons. From near the outset of the marketing year, crusher have been underperforming expectations with respect to volumes. While it appears likely that some plants – especially those that have been coaxed by handsome margin prospects into restarting this year – did experience some operational difficulties, those disruptions could not fully explain the slower-than-expected crushing pace. It now appears that the losses to US crush capacity is greater than was thought at the outset of 2017/18.
Cottonseed crushing margins rebounded in January, as was expected following the early December hike in cottonseed prices. The higher cottonseed prices combined with continued strong demand for protein meal domestically and abroad to allow cottonseed meal prices to gain 11 percent in the Midsouth and a powerful 23 percent in West Texas. The net product value of cottonseed products, which combines potential revenue for meal and oil with calculated expenses of crushing, rose 10 percent over the same period. Net product value underperformed gains to cottonseed meal values because of the persistently tepid demand for cottonseed oil.
Given cotton futures’ strong performance since mid-October, cotton producers may provide another year of high acreage in 2018/19. With nearby futures reaching as high as 84 cents per pound, the returns are attractive, and farmers are likely to respond with a second year of ample planted acreage. Particularly if futures prices remain at- tractive through February – crop insurance’s price determination window – the cottonseed industry could be facing another year of large supplies. This adds to the likelihood that late-season cottonseed prices could repeatedly test their price floor.
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Grady Ferguson 901-202-4443 firstname.lastname@example.org