Cottonseed Buyer Profiles

GROUP 1: Base demand group that will formulate cottonseed in at a 4-6 lb. inclusion rate regardless of price. GROUP 2: Formulates at a 2-3 lb. inclusion rate regardless of price, and would like to feed at the 4-6 lb. level. However, the last 2-4 lb. is price sensitive. GROUP 3: This is the major swing factor for cottonseed demand. They enter the market when the price is right or other factors prevail (i.e. short hay supplies), and will subsequently exit when other opportunities exist. GROUP 4: This group does not have access to, or the ability to incorporate whole cottonseed into their rations. However over time, dairymen in this group will migrate up into Groups 1, 2 or 3.

In the February edition, we discussed how it was important to anticipate and recognize changes entering the market. At that time, the lack of fresh consumptive demand appeared to be weighing on market sentiment in a big way. Then the February BFP was released on March 5^th, which reflected a drop in prices from $16/cwt., all the way down to $10.27/cwt. Trying to find fresh news that was supportive to stable cottonseed consumption seemed hard to find. However, one overriding factor remained in the market, the 1998 cotton crop was the smallest in 10 years. Well, the downward slide continued all the way through mid-March before the outlook began to change. As we approached April, it became apparent that dairymen were not pulling cottonseed out of rations once their Jan-Mar contracts were consumed. In fact, all indications suggest they have reentered the market, and suddenly, prices have rebounded in a big way. This is especially true in the Mid-South and Southeast.

The region with the poorest supply fundamentals at present appears to be that of west Texas. This market has depreciated upwards of $30/ton since the first of the year, and prices are flat all the way through summer. Granted, this market has the poorest logistic fundamentals relative to large dairy demand, however, at a price, product can and will move to the Pacific Northwest and Midwest. We’re not there yet. However, if prices continue to strengthen to the east, this will likely begin to occur sometime this summer.

As we write, the California market continues to be driven by delayed availability of cottonseed originating from the Port of Richmond. We now understand cottonseed may not be available until April 5^th. This is at least 3 weeks later than original projections. Subsequently, the spot market remains supported, and garnering upwards of a $10 premium. Yet most importantly, this is simply draining inventories at a much faster pace than projected. What is interesting, is that the West Coast market has become dependent on imported cottonseed, in a relatively short period of time (a couple years). Whether it is originating from west Africa or Australia, the lead time is relatively long compared to other alternatives. And obviously, relatively small adjustments to the schedule like that from delayed harvest, delayed boat loading or delayed boat arrival can have an impact at the local level. For example, will truck availability be hindered and subsequent movement to the end user be impaired due to a change in the schedule? Once this first boatload of cottonseed begins to enter the market, there will be a steady stream from now to September.

The much anticipated USDA Planting Intentions Report was released on Wednesday, March 31. And as is commonly true with many USDA reports, they seem to raise as many questions as they answer. Out of the gate, corn and soybean acreage estimates looked friendly, but upon further examination, it appears 5 million acres were lost. Part of this may reflect a net reduction of double crop soybeans, and another factor may be that the USDA did not count acres going into canola. The later will however be reflected in the final planting report to be released in June. The net result, the CBOT started to make their own adjustments and prices came under considerable selling pressure throughout the day.

Well, the cotton acreage forecast also came in below many estimates (slightly higher than CSD’s estimate) at 13.941 million acres. However the big surprise was tied to regional differences. For example, contacts in west Texas felt that cotton acreage would be up sharply, especially on irrigated acres. Yet, this report forecasts that acreage will be virtually unchanged from 1998. And the big acreage increases are to occur in the Mid-South and Southeast. Suddenly, cotton production is once again shifting from the West back to the East, which is opposite of the trend evolving in recent years. Is King-Cotton back in the Mid-South? If we utilize approximate 3-year cotton yields, cottonseed yields per harvested bale and acreage abandonment, we project cottonseed production to approach 6.6 million tons this year. This would compare to 5.4 million tons in 1998.