COTTONSEED MARKET: During a month of increased price volatility, the outlook for cottonseed prices has been shaken up. Prior to the independently minor but collectively influential body of largely supportive news released during March, the forecast for cottonseed prices was neutral to bearish. Today, more near-term support is suggested. One element of the previous forecast remains: the fundamental price floor is still determined by the feeding industry’s alternative feed ingredient values. However, after the benchmark Midsouth cottonseed price rallied 13 percent from $150 per ton in early February to $170 in early March, the issue on the minds of many market participants has turned from downside to upside price risk. The answer has become slightly more complicated than it was in February, when there was very little to suggest price hikes ahead. Today, cottonseed’s price outlook must be broken into two time periods. Over roughly the next month, the supportive features that emerged in March have the potential to keep price risk to the upside. In the ending months of the marketing year, the price risk remains to the downside due to large stocks.
The most dominant feature supporting spot prices over the past month has been Argentina’s serious drought, which has pushed soybean production expectations below the bottom of most analysts’ ranges circa the turn of the calendar year. Now projected at 39 MMT according to Informa Economics IEG’s analysis, Argentine soybean production is expected to be the smallest since 2008. Burdened by a La Nina weather pattern that tends to produce drier-than-normal conditions for the country, its soybean meal exports will be significantly affected unless farmers decide to part with their large soybean stockpiles. Such stockpile drawdowns are unlikely given Argentine farmers’ reliance on stocks as a hedge against historically unpredictable shifts in government monetary and fiscal policy. Under current leadership, the country appears well positioned to bounce back next year, but the main near-term relief to soybean meal futures has been the slight rains received recently, which helped relax futures from highs above $400 per ton in early March to roughly $370 in late March.
The impact to cottonseed and cottonseed meal markets has been strong support from the underlying feed market. It was expected that the impacts to cottonseed meal would have been disproportionately strong as oil mills had already been struggling to meet all cottonseed meal demand given their decadal decline in crushing capacity. However, the supportive features led to an increase in late-March spot Midsouth cottonseed meal prices at roughly nine percent compared to a month earlier, whereas corresponding gains to cottonseed prices were approximately 13 percent. This unexpected result was caused by cottonseed meal reaching a pricing-out point sooner than expected. While soybean meal prices have been strong, Midsouth cottonseed meal prices at $335 and West Texas prices at $360 have caused a curtailing of volumes.
COTTONSEED BALANCE SHEET: In its latest monthly revisions to the cottonseed balance sheet, USDA reduced its 2017/18 crush projection by 50,000 tons to 1.950 million tons. This breaks with Informa’s projection at 2.000 million tons and represents the first time this year USDA has held a forecast below Informa’s. For the first several months of the marketing year – from August to February – USDA had maintained a crush expectation that was well above Informa’s, a disparity that Informa had argued against at length on account of reports from the field and the estimates of reductions to crush capacity over the past five years.
In 2012/13, cottonseed crushers managed to process 2.500 million tons, but since that time the crushing industry has contracted significantly, losing an estimated 300,000 tons of annual capacity at least. Processors in aggregate suffered a slow start to the 2017/18 because of operational difficulties, including one plant that was revived after years of being shuttered. While Informa did not adopt USDA’s lower crush projection, it believes the 50,000-ton difference is within the margin of error and reflects of a symbolic data gesture more than a material difference in balance sheet allocations.
Informa does take exception to USDA’s ton-for-ton offset of its March reduction to crush forecasts with its increase in feed, seed, and residual forecast. A pattern of USDA fully offsetting usage projections has been formed this marketing year and may be an analytical misstep by USDA. Historically, one consumptive channel is not able to absorb all of the tonnage abandoned by another consumptive channel without a reduction to price. While it is possible that feeders absorb all tonnage not used by crushers, current reluctance of market participants to embrace lower prices suggests USDA’s decision to offset usage projections relies on a future decline in cottonseed prices.
Reductions to cottonseed prices is certainly possible, particularly later in the season. The supportive news features over the past month, however, make a near-term price decline less likely. Thus, an increase in feeder purchases to the extent USDA predicts seems unlikely, at least over the next month. Consequently, USDA’s March carryout projections remained unchanged from February at 425,000 tons, whereas Informa’s carryout projection remained roughly 140,000 tons larger at 564,000 tons.
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Grady Ferguson 901-202-4443 email@example.com