October 15, 2012
World cotton ending stocks estimated for 2012/13 crop increased by 2.6 million bales because of higher production and lower consumption, according to the October 2012 supply/demand report by USDA. Production was raised in India, China, Brazil, Pakistan, and the U.S. But, consumption was reduced 2 million bales to only 36 million in China. That compares to 46 million two years ago.
U.S. 2012/13 ending stocks were forecast to increase from 5.3 to 5.6 million bales because production was raised to 17.3 million and exports reduced. As a result, USDA lowered the upper end range of the September report for producer prices this season by 4 cents to 62 to 74 cents.
The bearish report weakened December ’12 and December ’13 futures prices. December ’12 has traded mostly between 71 and 72 cents per pound since September 25th. Fundamentally, December ’12 has more reasons to move lower into the mid-sixty cent range than increase much above 70 cents this fall.
With China’s government holding 36.6 million bales of the estimated 79.1 million 2012/13 world crop carryover stocks, the availability of exportable stocks is substantially reduced to only 42.5 million. It appears that with declining use, the Chinese government may slow their buying cotton to store or they may reduce their government cotton stockpile. Either alternative will weaken world cotton price and improve cotton consumption.
High corn, sorghum, soybean, and wheat prices relative to cotton are expected to cut U.S. cotton acreage substantially from the 12.36 million acres planted this year. In early October, the prices favored grain over cotton by a wide margin.
December ’13 futures prices as of early October were around $6.25 per bushel for December ’13 corn; November ’13 soybeans, $13.25 per bushel; July ’13 wheat, $8.30 per bushel; and for December ’13 cotton 76 cents per pound. Clearly, while the cotton price is well below the production cost, grain prices are far above costs of production.
Therefore, assume cotton growers slash acreage 40 percent from the 12.36 million this year and plant only 7.4 million acres. Using average abandonment and yield, a potential crop of some 11 million bales could be expected. That would be the smallest acreage since 7.9 million in 1983 when the Acreage Reduction Program (ARP) was 20 percent.
Further assume that the 2012/13 73.8 million acres of foreign cotton was reduced only 15 percent because many foreign growers tend to change acreage slowly. Thus, using average yields, the foreign crop might be around 84 million, compared to a 99 million bale crop this year. That suggests world production of 95 million (84 + 11) bales. If consumption increases from 103 million this season to 107 next season, the ending world stocks would decrease the world surplus of 79 million to a smaller surplus of 67 million. Therefore, a sluggish cash price is expected.
In all, there is little incentive for cotton prices to move much higher, say to 80 to 85 cents per pound for next planting season. Growers need to develop a financial plan based on alternative crops, crop revenue insurance, and pricing strategies as soon as practical.
Price risk is great. More corn, sorghum, wheat, and soybeans next harvest season will mean lower grain prices.