Too Much Cotton, Too Little Demand

June 14, 2012

The cotton market perspective includes abundant supply, sluggish demand and weak prices.  December ’12 futures have dropped steadily from around 97 cents per pound in early February 2012 to the 65-70 cent range in mid-June.

The lower price trend is a typical price pattern for an expected 2012/13 world crop that exceeds demand for a second year in a row.  World production exceeded mill use by 17 million bales in 2011/12 and is projected to be 6 million more than use for the 2012/13 season.  As a result, 2012/13 world carryover stocks are a record 75 million bales with a stocks-to-use (s/u) of 68 percent.  A 40 percent s/u is adequate.  The s/u was 63 percent in 2011/12 and 43 percent in 2010/11.

The projected price range by USDA for the 2012/13 season, received by producers, was lowered by 5 cents from the month before to 60-80 cents.  The 20-cent range indicates great price uncertainty because of potential shifts in crop size and weak demand.

As of mid-June, the U.S. crop condition is about average.  The Southeast and Mid-South regions have good moisture.  But, in Texas, although rainfall is better than last year, the subsoil moisture is limited.  At least 25 percent abandonment of planted acreage is likely in Texas.  Timely rainfall is necessary for an average crop.

World cotton consumption has decreased rapidly since a record 124 million bales were used in 2006/07.  Meanwhile, production has surged following the run-up of cotton price above $1.00 per pound that started in September 2010.  The higher price reduced demand substantially and encouraged more world production.

Because of relatively high prices for corn and soybeans this spring compared to cotton, U.S. cotton acreage may fall short of the 13.16 million intended last March.  Assuming 12.75 million planted acres and 15 percent abandonment, a U.S. crop size around 18 million bales could be expected.  However, China may not be an aggressive export buyer, and U.S. carryover stocks could increase several million bales more than the 4.9 million projected.

Given the indirect forces of economic conditions and strength of the dollar that affect the cotton market, erratic price movements are expected.  Price can change direction without notice.  Be careful in using futures contracts that expose you to excessive margin calls.  When feasible, use options that do require a premium but are not subject to margin calls.  An 85-cent December ’12 put strike price placed in early 2012 as a floor for about 5 cents per pound premium offered around 10 cents profit when December dropped to 70 cents or less.  When December ’12 price moves below 70 cents, you have few pricing opportunities other than the Commodity Credit Corporation loan program.


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