February 14, 2012
World cotton stocks for the 2011/12 season were increased substantially from a month ago according to the February USDA supply and demand estimates. The result is a price depressing stocks-to-use ratio of more than six months consumption.
With foreign production and consumption about equal, the U.S. cotton price must adjust low enough to attract foreign buyers. Yet, the price must keep high enough to encourage U.S. growers to plant sufficient cotton acreage rather than corn and soybeans to meet around a 16 million bale market. The lower price is expected to improve demand and decrease plantings worldwide.
U.S. export estimate remains at 11.0 million bales. That compares to 14.4 million for the 2010 season and is the lowest since the 2001 crop. By the first week in February, U.S. exports totaled 4.4 million statistical bales, or only 40% of the estimated shipments. Weekly exports of 267,000 bales are needed to reach the projected total. By early February, because of heavy cancellations of purchase contracts, only 1.7 million bales out of 4.2 million ordered by China had been shipped to them.
Price movements trading in the mid-nineties are waiting for signals to move up a little or drop. Support for a higher price is weak because of the surplus global supply and weak demand. The potential for a 2012 world crop in excess of demand seems likely. A December futures decline below 85 cents might open the door for a price drop to a 70-75 cent range by mid-year.
Therefore, protection against a price decline below 90 cents is highly desirable. A 93 cent December put option in early February was around 7 cents per pound. An out-of-the-money put at 88 cents was about 5 cents. Thus, a grower could "fix" a floor on December futures in the 86 to 83 cent range. The usual negative basis would put the farm price around 80 cents.
The 2012/13 cotton intentions survey released by the National Cotton Council on February 11th suggests U.S. producers will reduce plantings from the 2011/12 crop only 7.5 percent to 13.6 million acres of all cotton. That is 24 percent more acreage than in 2010/11 when the crop was 18.1 million, exports 14.4 million, and carryover was 2.6 million bales. With export demand sluggish, a potential 2012 crop might boost carryover stocks to the 5 to 6 million bale level and push price lower.
Texas, with more than half of U.S. acreage, holds the key to crop size. For example, in 2011 Texas growers harvested only 3.12 million bales of all cotton, according to USDA/NASS. Dry, hot, windy weather reduced the harvested acreage 59 percent from the 7.57 million planted. The year before, Texas growers planted 5.57 million acres and harvested 5.37 million bales.
The rate of planted acreage abandonment in Texas alone suggests the U.S. crop could be 16 to 20 million bales. The outcome is unpredictable.
Growers need a sound marketing plan now. Develop price expectations early from reliable information. Be prepared to implement decisions quickly because price movements are subject to sharp turns up or down overnight. In all, the downside risk from mid-nineties appears much greater than a rally over $1.00 per pound.
A Cotton Price Risk Management Seminar coordinated by Cotton Incorporated will be held on Wednesday, February 29, 2012 at the U.S. Arid-Land Agricultural Research Center, USDA, 21881 North Cardon Lane, Maricopa, Arizona. There will also be a Cotton Price Risk Management Seminar on March 1, 2012 at the Harris Ranch in Coalinga, California. Dr. Carl Anderson and Dr. John Robinson will discuss when and how to use a variety of option strategies including: hedging strategies based on various price scenarios, and integrating crop and revenue insurance. Dr. O.A. Cleveland will be discussing the Cotton Market Outlook. Mike Stevens will be the discussion leader. No attendance fee; lunch will be provided. To register, contact Kay Wriedt at 919-678-2271 or firstname.lastname@example.org.