December 11, 1998

New York cotton futures ended mostly lower to mixed this week as traders were cautious ahead of both USDA's export sales report and the department's supply/demand report. Each report held a few small surprises to market observers.

USDA's December supply/demand report showed increased 1998-99 U.S and world cotton production and a major jump in ending stocks, presenting a rather bearish picture for the futures market.

The department pegged 1998-99 U.S. production at 13.4 million bales, higher than last month's 13.2 million. U.S. ending stocks also were raised, from November's 2.3 million bales to 2.8 million. Analysts were not disappointed as they had expected a slightly higher U.S. crop, especially since Texas cotton had rebounded after a severe drought earlier this year. In fact, the Texas crop grew from the department's previous estimate of 3.0 million bales to 3.3 million bales. Smaller increases also were seen in Arkansas and North Carolina. However, due to a poor growing season and delayed harvest, California's cotton production was cut 100,000 bales to 1.4 million.

A decline in U.S. exports and a rise in imports, which led to a large rise in U.S. ending stocks, was unexpected to most market observers. Projected U.S. exports fell 200,000 bales to 4.3 million, while imports rose 100,000 bales to 400,000. Analysts noted the imminent death of USDA's Step 2 export marketing program this December probably persuaded the agency to lower its export estimate for the season. "Slightly larger imports will be needed to help ease the shortage of cotton, especially high-grade growths that mills need," USDA commented.

World numbers held even larger surprises to those in the industry. The world crop increased from 83.6 million to 84.2 million bales, while ending stocks rose from 37.3 million to 39.3 million. Larger ending stocks resulted from a combination of lower world consumption, higher production and lower exports.

Meanwhile, USDA's weekly export sales report was considered impressive by most in the industry, especially shipments at 303,400 bales for the week ended December 3, a record high for the marketing year. The shipments reflect merchant efforts to complete business in time to receive USDA's dwindling Step 2 export subsidies, which are expected to end near Christmas. P>The department reported net U.S. export sales of 1998-99 crop cotton was 86,400 bales for the week ended December 3, a figure considerably lower than the previous week's 119,500 bales, but higher than most analysts had expected. Additionally, 20,700 bales of 1999-00 crop cotton were sold. The report surprised analysts as the majority thought sales would be down dramatically from the past two reports because most sales made in that time frame likely will not qualify for subsidies.

Mexico, a large buyer of U.S. cotton in the last two reports, once again purchased the largest amount of U.S. cotton, according to USDA. Hong Kong followed as the second highest buyer of U.S. cotton, and Canada completed the top three.

Sales also were healthy in the spot cotton market. In the five trading days ended December 3, sales of cotton on the TELCOT electronic marketing system totaled 52,847 bales, slightly lower than the previous week's 62,375 bale figure. Average daily prices received by producers on TELCOT ranged from 52.56 to 54.56 cents per pound during the week.