Protect Price Floor, Downside Price Risk Great

May 13, 2013

As expected, the May U.S. cotton 2013/14 projections by USDA include a smaller crop, and a decrease in exports and ending stocks compared with the 2012/13 season. Projected production is 14.0 million bales, 3.3 million less than in 2012/13. Domestic mill use is projected to increase 100,000 bales to 3.5 million. Exports are expected to decrease to 11.5 million bales from 13.25 million in 2012/13. The decline is due to smaller U.S. supply and lower imports by China.

Ending stocks in the U.S. are expected to decrease to 3.0 million bales from 4.0 million in 2012/13. That is the least since 2.6 million in 2010 and well below the 10-year average. The forecast range for the 2013/14 marketing year average price is a cautious wide 68.0 to 88.0 cent per pound spread, compared to 72 cents for the 2012/13 crop.

The first 2013/14 world cotton projections show world ending stocks at a record 93 million bales. However, 63% of stocks are held as surplus in China. Only 37% are available for international trade from rest of world (ROW).

Consequently, world ending stocks are divided with China controlling a large stockpile compared to the ROW. Because of the uneven division, world supply and demand are completely out of balance.

Depending upon Chinese cotton policy, the market price in the ROW could move down into a 60-cent range or increase above 90 cents per pound.

Depending upon Chinese cotton policy, the market price in the ROW could move down into a 60-cent range or increase above 90 cents per pound.

Market price is in a dangerous financial position. China policymakers could decide to slowdown input buying and/or release some of their surplus stocks at anytime. The excess release would erode world price. Or, they may continue to import and closely manage their surplus stocks and support world price.

The current 80 to 90 cent December ’13 futures price range is watching to see what policy decision and market forces surface next.

In the U.S., prospects for the 2013/14 crop are unclear. However, a 14.0 million bale crop is reasonable to expect at this time.

Texas, where over half the U.S. cotton crop is planted, is extremely dry. In Texas, abandoned cotton planted acreage is expected to be in the 2 to 3 million acre range and production in the vicinity of 4.0 million bales. The Texas crop was 3.5 million in 2011 and 5.0 million in 2012.

The Delta area is receiving too much rain and may cause some acreage increase as growers switch to cotton rather than plant late corn. The Southeast area is in fair shape.

The price staying above 85 cents on December ’13 futures is a high risk situation. Price could drop fast without much notice.

Producers should have a plan to set a floor on part of their cotton around 80 cents. Out-of-themoney put options could be used. That would leave the upside open.


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