wmeubank@ocp.kcmo.com
PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(August 18, 1997) COTTON: The first Crop report of the season proved to be a dud for traders. Well, more of a dud for the shorts than the longs, I admit. Yet it could almost be labeled a non-event. But at least we have a good starting place for our bets next month.
I don't pretend to be clairvoyant, but my hunch is that this report will be the lowest of the season. First of all, the initial yield of 637 pounds is over forty pounds under the average of the past five August estimates and fifteen pounds under the average of the final results. I don't think things are that bad. Second, we've certainly had timely rains since the survey was taken at the end of July. Third, if insects are going to be a problem, they certainly haven't shown up yet. I was incorrect in saying that the August report has never been the lowest during the past ten seasons. That was precisely the case in 1989, as it was on three other occasions during the '80's.
A glance at the production by region shows a remarkable trend. We are all accustomed to the notion of going west, but that certainly hasn't been the case with cotton production. Ten years ago, the Far West contributed 28% of our crop. This year, it starts off at only 20%. Production in the Southeast has better than quadrupled. Ten years ago, it only amounted to 7% of the U.S. crop. This year, it starts off at 27% of the total and is almost 20% above the Far West. California and Georgia are running neck and neck for second place in the upland race, and if Georgia wins, it will pass the Golden Bear for the first time since 1946.
This is the December contract price history the bulls are looking at:
Post Report Subsequent High 1996 70 78 (early October). The August Crop report was a bullish surprise. 1995 71 94 (late September). Bugs began to eat up the Delta crop. 1994 66 71 (mid September). The market did not buy the Texas numbers. 1993 55 60 (late September). Both the U.S. and China crop began going bad.
The 1992 and 1991 seasons were unforgiving bears. In all those six years, the specs found themselves short about 20% at the time of the August Crop report. They were playing winning hands each time, but have come up losers these past four years. 1990 and 1988 also rewarded anyone buying the market after the August report.
However, history can't tell us the future. The bearish argument lies not only with the prospect of our crop improving, but more importantly, with the possibility of near-record crops in India and Pakistan. Should early rosy predictions prove correct, the current deficit in the USDA balance sheet would quickly tip to a surplus by a million or more bales. So, as usual, our crystal ball remains cloudy. The best prediction, sadly: more of the same.
Herman S. Kohlmeyer for Ernest Simon
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