Improved Crop Conditions Trigger Price Drop

July 15, 2014

December ’14 futures price has dropped from a 78¢ level to 68¢ in two weeks. Surplus stocks in China, lower expected imports into China, and increasing stocks in countries outside of China are main causes of lower prices.

For the fifth season in a row, world production is also expected to exceed consumption. Although China holds around 60% of world stocks, but uses only onethird, the rest of the world is building stocks too.

In the U.S., 2014/15 carryover stocks are expected to increase substantially because of more planted cotton acreage and production than last season. The cotton crop condition in Texas as of July 14th is over 75% fair to excellent. This season only 20% of the estimated 6.45 million acres planted may be abandoned. That compares to 40 to 62% abandonments the last three seasons.

Texas has a history of big and little crops. In 2010, Texas growers planted 5.55 million acres and harvested 5.35 million acres, with only 4% abandonment. Production was a big 7.84 million bale crop. But, last year, Texas growers planted 5.8 million acres and harvested only 3.1 million acres that produced only 4.17 million bales. That is roughly 3.5 million bales less produced in 2013/14 on a few more acres planted than in 2010.

The Texas crop is in much better condition than a year ago. Good rains from late May up to mid-July have “saved” the West Texas 3.5 million acre dryland crop from another complete disaster.

However, the crop is off to a late start and needs timely rain and warm temperatures until mid-October. Most of the area is short on both top soil and subsoil moisture. The crop needs sunshine and favorable daytime temperatures.

In South Texas, the Coastal Bend area, and the Blacklands, cotton is in above average condition. The quality is expected to be excellent.

The U.S. cotton crop in July was projected by USDA at 16.5 million bales for the 2014/15 season. Carryover stocks from the 2014/15 crop was placed at 5.2 million bales. That is almost twice as much as from last season’s crop.

As a result, I expect December ’14 futures prices to trade in the 65 to 75¢ range for the next several months.

In May, a futures option strategy was discussed of buying an 80¢ December ’14 put option for 3¢ per pound. On July 14th, the 80¢ December ’14 put value traded close to 12¢. Thus, the net profit would have been 9¢ per pound.

This is a good example of a strategy, at the time, which could have been used to enhance income. However, decision time was short. In today’s market atmosphere, price risk is great.


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