May 14, 2012
The May 10th USDA cotton projections continue to reflect a cotton surplus.
The first 2012 world cotton projections indicate record world carryover stocks for the second season in a row. Production is expected to exceed consumption by nearly 7 million bales, despite reduced acreage in most cotton producing countries.
The increase in world supply for the 2012/13 season adds to the 16.5 million bales remaining from the 2011/12 season for an enormous 23 million bale surplus carryover in two seasons. The world carryover stocks-to-use (s/u) stands at 67 percent. Because s/u of 40 percent is sufficient, much lower prices can be expected.
China has been a major buyer of U.S. cotton in order to build their stocks, currently estimated at nearly 20 million bales. China’s government has not indicated how they will manage their deficit production of some 11 million bales for the 2012/13 crop.
The economic forces of supply and demand driven by unrealistic run-up of the cotton prices above $2.00 per pound a year ago are now driving price far below a dollar per pound. Man-made fiber prices that were much lower than cotton and weak demand for the higher priced cotton have cut demand for cotton.
There is too much cotton worldwide for too little demand.
Foreign growers responded to the high price of cotton last year by producing more cotton than the market could use until price gets much lower.
The USDA’s projections for the 2012/13 “new” U.S. crop include a higher supply, demand, and carryover stocks than the current 2011/12 season. Ending stocks of 4.9 million bales for the “new” crop are the largest in the three last seasons. That is based on an estimated U.S. crop of only 17 million bales, compared to the drought reduced 15.6 million bale crop in 2011/12. Currently, USDA projects a producer price for the “new” season of only 65 to 85 cents, compared to 91 cents for the 2011/12 season.
The Texas cotton crop depends largely on timely rainfall across about 5 million acres in West Texas during the next month. Widespread beneficial rains during the week of May 7th are very encouraging for producing a reasonable Texas crop of maybe 6 million or more bales, compared to 3.5 million for the 2011/12 season.
However, before May 6, the main Texas cotton growing area had received less than one inch of rain since January 1st. Subsoil moisture is scarce. The rain will be a big boost to the irrigated cotton.
December ‘12 futures prices have dropped from 97 cents per pound in February to the vicinity of 77 cents in early May. That is a $100 per bale decrease. A December ‘12 put around 90 cents in February that cost some 6 cents is now worth around 15 cents. Even an 80 cent December ‘12 put in February for 2 cents is now worth near 7 cents.
There is a good chance the price will continue trading lower. How low is the big question.
Prospects of an 18 million bale or larger U.S. crop supports the likelihood of a world 2012/13 crop well above use. The low for December ‘12 by harvest time may slip below 70 cents.