January 12, 2011
The January USDA supply/demand estimates for 2011 cotton continue to indicate very low world supplies for the 2010/11 season. With U.S. stocks essentially sold out, 2011/12 planted acreage and growing weather conditions are the focus of the U.S. market for the new crop. December ’11 futures above $1.00 per pound is clear evidence that the market is trying to buy more cotton acreage. The price for crops competing for acreage is also relatively high.
Cotton producers will plant more cotton than a year ago. The question is how much more. Current expectations range around 13.0 million planted acres, which is 18 percent more than the 11.0 million last year. Assuming 10 percent abandonment and this year’s 821 pounds per harvested acre yield, a crop of 20.0 million bales would be expected. Also, assuming 15.0 million bales exported and 3.6 million domestic use (total use 18.6 million), the U.S. carryover would increase less than 2 million bales next season. Being a residual supplier, that leaves the risk of possible bad weather in the main production areas (U.S., China and India) a dominant force in the price of cotton.
Because of the weather risk and very tight supply, the price for 2011/12 cotton has much upward potential this planting season (April-May) above a dollar per pound for December ’11 futures. What is most significant to higher price is that China, the world’s largest user of cotton, has only 28 percent stocks-to-use, compared to 54 percent during 1994/95 price rally. That is reflected in the “A” Index around $1.76 per pound today, compared to March ’11 futures of $1.48 cents. Where the “A” Index is about 28 cents higher than nearby March futures, it normally trades 6 to 8 cents lower than nearby U.S. futures.
However, foreign potential production is upper most to December ’11 futures holding above $1.00 per pound for the new crop. A 10 percent increase in foreign acreage would likely add some 10 million bales to production, while expected consumption might decrease about 2 million bales. The result could add 10 to 12 million more bales to world carryover of 43 million bales. That would increase world stocks-to-use from 37 percent for 2010/11 crop to 45 percent for the 2011/12 crop. Usually, stocksto- use of 40 percent and above tends to weaken the market.
Foreign cotton production relative to use, currently at a 16 million bale deficit, dominates the U.S. futures market fundamentally. Too, the U.S. produces only 13 to 16 percent of the world’s cotton. A rapid recovery of foreign production could curtail export demand in a season.
A look back to the mid-nineties, the “A” Index price rally above 91 cents per pound shows world acreage and production increased substantially, while demand was fairly stable. With polyester price far below cotton price, foreign textile mills are shifting to higher blends of manmade fiber.
The market perspective for the 2011/12 season includes increased cotton acreage from this season, a much larger world crop, sluggish demand, and a lower price. Already, December ’11 futures is lagging far behind March ’11 futures.
Futures prices are erratic. Consider fixing a price while December ’11 futures are above $1.00 per pound. It appears the price will remain strong at least until planting time. Don’t forget a much larger Southern Hemisphere cotton crop will become available in April. Observe world market conditions and develop pricing skills to protect against adverse price moves.
The Ag Market Network Teleconference will be Thursday, January 13, 2011 at 7:30 a.m. Central Time. Featured speakers this month will be Dr. Terry Barr, CoBank Senior Director; Jarral Neeper, Calcot President, and John Robinson, TAMU Cotton Economist. The cotton marketing panel is Mike Stevens, O.A. Cleveland, and Carl Anderson. Pat McClatchy is the Ag Market Network Moderator. The conference will be live on radio station KFLP 900 AM, Floydada, Texas; and KZIP 1310 AM, Amarillo, Texas; live over the Internet at www.AgMarketNetwork.net; or you can listen to a recording around noon at www.AgMarketNetwork.net. Weekly updates are made on Friday afternoon by Mike Stevens.