April 11, 2014
The U.S. cotton estimate for 2013/14 includes less production and carryover stocks compared to last month. Because cotton ginnings were lower than USDA’s previous estimate, USDA dropped U.S. production more than 300,000 bales to 12.9 million from last month’s projection. That is the smallest crop since 12.2 million in 2009.
The expected carryover was reduced to only 2.5 million bales, the lowest level in decades. The average price received was increased slightly to a range of 76 to 79 cents for old crop cotton.
The April world cotton 2013/14 projections include a 1.0 million bale increase in expected imports by China. Production was decreased slightly, but still leaves a surplus of cotton on hand worldwide. Carryover stocks are only 12.5 million bales short of world seasonal use of 109.5 million bales.
However, the availability of these stocks for export to other countries is extremely distorted. Carryover stocks as a percent of use (s/u) in China is 166%; foreign minus China s/u is 51%; and s/u in the U.S. is 17%. The distortion sets the stage for unusual stress in market prices allocating international cotton flow.
U.S. exports are strong and stocks are growing tight. December ’14 futures could get a boost into the high eighty cent range.
Although Texas cotton acreage will increase substantially, moisture across 75 to 90% of the cotton area remains too dry to grow cotton. And, there is only about two months left to get enough moisture to harvest a crop on much of the dryland acreage. In 2011, 62% of the Texas planted acreage was abandoned; in 2012, 41%; and in 2013, 45%.
If Texas cotton acreage (dryland and irrigated) reaches 6.5 million planted acres, around half of the acreage could be abandoned. The crop harvested might struggle to exceed this season’s 4.3 million bales. The U.S. crop may be around 13 million bales, in the vicinity of this season’s short crop.
On the other hand, if china decides to reduce their stockpile of 59 million bales and the U.S. crop gets timely rain for a 15 to 16 million bale harvest, December futures could trade in the low 70-cent range. December futures is volatile enough for swings between 70 and 90 cents.
During price rallies over 79 cents, out-of-the-money December put options are viable alternatives to purchase for price protection against lower prices.