March 10, 2011
The latest USDA supply and demand estimates did not change the U.S. 2010/11 crop data. However, the forecast for farm price range of 80 to 83 cents per pound was trimmed one cent on each end.
The world supply and demand estimates increased the Australia crop by 500,000 bales and in Brazil by 600,000 bales. China’s crop was reduced by 500,000 bales, and in India one million bales. Because the decreases mostly offset the increases, world carryover was reduced by only 500,000 bales.
In Texas, where over half of the U.S. cotton acreage will be planted, dry moisture conditions continue to persist. The lack of moisture for planting sorghum and corn could increase cotton acreage more than intended. Yet, the yields could be below average and a substantial two million acres could be abandoned in Texas alone. Also, planting moisture is needed across Louisiana, Mississippi, Georgia and elsewhere in the Cotton Belt. The potential for a U.S. crop size easily ranges from 18 to 22 million bales, depending on rainfall over the next three months.
The cotton market perspective for the 2011/12 season includes increased acreage worldwide from the 2010/11 season, a large crop, sluggish demand, and a lower price level. The record cotton price has set the stage for another round of increasing stocks. Weather and economic conditions will determine if it will take more than one season for much lower prices to surface.
Scarce cotton supplies have led to record high prices on March ’11 futures of over $2.00 per pound for the 2010/11 “old” crop. However, December ’11 futures price for the 2011/12 “new” crop is currently trading around $1.20 per pound, about 80 cents lower. Yes, the lower December ’11 futures price has already anticipated a sizable increase in cotton supply for the fall harvest season.
Where the Southern Hemisphere producers in Argentina, Australia, and Brazil together produced 8.23 million bales in 2009/10, they are expected to produce 14.55 million in their spring harvest, a 77 percent increase in response to record prices. These countries are early indicators for the expected surge in global cotton acreage.
Thus, the potential for increased world production well beyond use depends mainly upon increased size of foreign acreage and production. Relative high prices for corn and soybeans will compete strongly for global cotton acreage. A potential modest 10 percent or more increase in foreign cotton production for the 2011/12 season could add at least 10 million bales more than world use. If so, world carryover inventory would be near 53 million bales at the end of the 2011/12 season, up 24 percent from the 2010/11 crop. The increase suggests the cotton price will be much lower as indicated by December ’11 futures. “High prices are the cure for high prices” because world producers are encouraged by favorable price to plant more cotton. Meanwhile, demand weakens because of higher prices until adequate supply drives the price lower, causing another price cycle from lower to higher prices. Prior to the 2010/11 shortage of cotton, the U.S. December futures contracts season’s highest prices for 10 years averaged around 83 cents per pound while the lowest average price was around 43 cents. Because there is substantial evidence for a much larger global cotton harvest this fall compared to a year earlier, cotton growers are encouraged to place a floor price under their 2011/12 cotton crop. The likelihood of a lower price than $1.25 per pound is much greater than for a much higher price. There is no one pricing strategy that always gets the higher price. Therefore, evaluate the advantages and disadvantages of pools, market associations, forward contracts, and cautious use of options and option spreads. A combination of strategies is okay. Since limit moves on futures are common, minimize price risk and try to maximize income.