March 13, 2013
The March cotton estimates for the U.S. 2012/13 crop by USDA increased exports and decreased carryover stocks, compared to a month ago. Exports, based on strong shipments and sales in recent weeks, were increased 250,000 bales to 12.75 million, the largest amount in two seasons. Average producer price was forecast at 70 to 73 cents for the 2012/13 crop.
The world cotton estimates included higher production, consumption, and trade. However, global carryover stocks were forecast at a high level of 81.7 million bales, only slightly less than last month. Yet, futures prices in the U.S. have been on a sustained rally since last fall. December ’13 futures moved through the 85 cent barrier with ease and headed higher the next few days.
At this time, the international cotton market is divided into China and the rest-of-the-world (ROW). The division creates great uncertainty because cotton policy in China is flexible and, therefore, their intentions to buy and sell at home and abroad are unknown.
Meanwhile, China has a surplus of more than a year’s use in their country hanging over the market. But, China holds more than half the world’s carryover stocks and uses only onethird of the world’s supply. The ROW holds a little less than half the world stocks and uses two-thirds of the supply.
Therefore, stocks in the ROW have dropped rapidly since the 2010/11 crop and are rising sharply in China. The speed of stocks increasing in China and dropping in the ROW supports the higher price movement in U.S. futures in the last four months.
The stocks relationship is different than in the late 1990’s. In 1997/98 and 1998/99 world stocks were balanced around 50 percent between China and the ROW. Then, the balance quickly changed in the opposite direction with the share of world stocks increasing at a rapid pace in 1999/00 and 2001/02 toward ROW and declining in China. The “A” Index (world price) decreased from near 80 cents in 1996/97 to almost 40 cents by 2001/02 as ROW stocks became plentiful.
Given that ROW stocks are now getting tight relative to China’s government controlled stock surplus, the price rally is a signal that the ROW needs more cotton acreage planted this spring.
The price staying above 85 cents based on December ’13 futures is a high risk situation. Cotton policy in China could change quickly and weather conditions in cotton producing countries might turn favorable. Price could drop 10 cents per pound in a few weeks.
Producers should have a plan to set a floor on a reasonable amount of their cotton in the mid-eighty cent level. Put options and option spreads can be used and still benefit from higher price later.