COTTONSEED MARKET: Significant prices declines over the past month in the Southeast, Midsouth, and West Texas signal the onset of the ginning season. Falling at a greater rate than normal, these sharp declines suggest robust new-crop quantities. The sharpness of the declines was also encouraged by a brief period of tightness in old-crop supplies. The Midsouth exhibited price action representative of this effect, with values having touched $230 per ton a month prior to new crop before dropping precipitously to their current levels around $145. Californian gins have also come online, likewise bursting the pre-ginning rally; support to that market had been from a combination of poor-quality old-crop cottonseed in West Texas and logistical delays for off-season tonnage delivered by rail. The rates at which markets devalued cottonseed across the US depended on gin start dates, though now prices are falling in essentially all geographies. While the nationwide end-of-season price firmness was not anticipated by Informa Economics IEG, the arrival of new-crop quantities has corrected that temporary price action and pulled values back within Informa’s forecast ranges.
With tightness in the 2016/17 crop now in the past, the question has become whether markets have any further to fall. The main uncertainty around supplies is the degree to which last weekend’s (October 28) freezing temperatures in Texas reduced cottonseed production capacity. With nearly half of Texas’ cotton already harvested, Texas’ proportion of bolls open was reported most recently at 90 percent, leaving only 10 percent subject to closed-boll deterioration. The other supply-side concern is truncated development cause by the freeze, which reached 24 degrees in some parts of the state. If the freeze had come three weeks later, around November 18 as was expected, plants would have had that time to build out cottonseed production.
With national supplies widely believed to be ample, a ginning-season price floor chiefly depends on two demand factors. First, how will deteriorating dairy margins undercut the dairy industry’s aggregate demand for feed ingredients. Second, how will cottonseed crushers be able to cope with historically large crushing volumes given their dwindling crush capacity. Dairy margins have faded from a month ago, particularly for the deferred delivery periods. Falling dairy prices domestically and internationally have resulted from overproduction, which may cut into cottonseed demand during the spring flush.
2012/13, these crushers managed to accommodate 2.500 million tons, which is 75,000 tons above Informa’s current 2017/18 crush projection at 2.425 million tons and even further above USDA’s projection at 2.400 million tons. Many in the industry believe even a 2.400-million-ton crush is no longer achievable. As expected, crushing margins have improved as new-crop cottonseed has become available. Time may provide the only ability clarity into how oil mills will be able to squeeze greater processing rates out of mills, many of which are aging and some of which have been resurrected after years of laying idle. If 100,000 tons of capacity has been lost in the crushing sector, a more bearish cottonseed opinion would result. Because dairy margins may take the better part of the marketing year to equilibrate and cottonseed crushers may not be able to capture all of the currently strong protein meal demand, the outlook for cottonseed is neutral to bearish.
COTTONSEED BALANCE SHEET: October contained a few fundamental features that suggested some price support, though most of the factors still point to price weakness in the months ahead. The largest supportive feature in October was USDA’s reduction of cotton and cottonseed production, primarily in Texas. USDA reduced 2107/18 cottonseed production projections by 192,000 tons to 6.676 million tons in response to their reduction in cotton production projections by approximately 200,000 bales to 21.115 million bales the week prior. The decrease in cotton output was prompted by a 100,000-acre reduction to area. Informa did not adopt the entirety of the forecast cottonseed production decrease, reducing projected output by only 50,000 tons to 6.800 million tons because of a more optimistic opinion of the effect of Hurricanes Harvey and Irma.
USDA reduced only feed, seed, and residual 2017/18 demand usage projections, lowering it by 50,000 tons. Informa responded to its lower production forecasts by decreasing feed usage projections by 25,000 tons but increased its crush projections by 100,000 tons. The higher crush forecasts were made because, unlike the nearly indefatigable demand of feeders, crushers have a limit to their demand. A decline in feeding demand could mean that crushing capacity is reached, which would push all cottonseed that cannot go to feed or export at current price levels into 2017/18 cottonseed carryout. This would cause a decline in prices from current levels. Even after the increased purchases of cheaper cottonseed by feeders, the larger carryout may weigh on the minds of market participants and encourage declines in prices. Lower input prices and higher margins for crushers account for the increase to Informa’s crush forecasts
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