Foreign Stocks Revised Upward

April 11, 2012

The April USDA forecast raised world ending stocks substantially and reduced production and consumption slightly. Where world carryover stocks of 4.5 to 5.0 months use are sufficient, carryover from the 2011/12 season is expected to exceed 7 months of use.

Historical adjustments for India increased beginning stocks by 3.25 million bales and ending stocks by 1.6 million bales for the 2011/12 season. The government of China’s accumulation of cotton in their national reserve is limiting free supplies which is boosting its imports and, at the same time, curtailing consumption. China’s stocks were raised sharply. Ending stocks in China now account for 35 percent of world stocks.

For the U.S., this month’s supply and demand estimates include a little less production, increased exports, and fewer carryover stocks. The USDA forecast range for producer price is 89.0 to 93.0 cents per pound.

Although carryover stocks in the U.S. are relatively low, stocks in foreign countries are plentiful. Carryover stocks in export nations are equal to 100 percent of use in those countries. That is the largest since 95 percent in 2004/05 when the “A” Index averaged 53.4 cents per pound. Import nations also have larger supplies than in recent years.

"A" Index Versus Exporting Nations Stocks to Domestic Use Percent

In the U.S., strong prices for soybeans and corn are very attractive to switching some intended acreage from cotton to corn and beans. Therefore, 2012 intended cotton plantings of over 13 million acres may be slightly below 13 million. Western portions of the 6.8 million acres intended for cotton by Texas producers are still in dire need of planting and growing moisture.

Assuming 12.9 million U.S. all cotton acres, a 15 percent abandonment rate, and a conservative 800 pound per acre yield, the U.S. 2012/2013 crop would be around 18.3 million bales. Total domestic and export use of 16.0 million would add around 2.0 million bales to the 3.4 million expected from the 2011/2012 season.

If realized, a sizeable increase in next season’s carryover would lower price. With another season of foreign production near consumption and weak U.S. exports, harvest price could be much lower than the current 86 to 90 cents trading range based on December futures.

As of April 10, December ’12 futures were trading close to 87.3 cents per pound. The December 87 put premium was around 5 cents per pound and an 80-cent put was slightly above 2 cents.

The main pricing alternatives include organized pools, marketing associations, forward cash contracts, hedging with futures and options, and storage hoping for a higher price.


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