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The 2010/11 Cotton Supply Scarce

Feb 27, 1011

The latest USDA cotton supply and demand estimates were not changed from the month before. Ending stocks for this season remain tight at 1.9 million bales for the U.S. That compares to 2.95 million last season and 6.34 million two years ago. The forecast for average price received by producers was raised one cent on the lower end and reduced two cents on the upper end to a range of 79 to 84 cents per pound.

World supply and demand estimates were virtually unchanged. That leaves world ending stocks at 42.8 million bales, compared to 44 million last season, and a huge 60.5 million in 2008/09. Stocks-to-use (s/u) is 36.7 percent this season, down slightly from last year. In 2008/09, s/u was a surplus at 55 percent.

Two seasons of limited world stocks and scarce U.S. stocks for the 2010/11 crop at 9.8 percent s/u is substantially lower than 19 percent a year earlier and 37.6 percent two seasons ago. So, the U.S., as a residual supplier, is limited until the new 2010/11 crop becomes available this fall.

Scarce supplies worldwide have led to record high prices on March ’11 futures above 175 cents per pound. However, December ’11 futures is trading about 50 cents lower. The high price is expected to encourage more production and slow demand.

As a result, the market perspective for the 2011/12 season includes increased acreage from this season, large world crop, sluggish demand, and a lower price level. This season’s 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 lower prices to surface.

Where the Southern Hemisphere producers in Argentina and Brazil together produced 7.23 million bales in 2009/10, they are expected to produce 12.2 million this season. That is a 69 percent increase in response to record prices.

According to the National Cotton Council early season’s survey, U.S. cotton producers intend to plant 12.5 million acres this spring, up almost 14 percent from 11.0 million last year. However, production will likely increase only one million more than the 18.3 million expected this season.

Thus, the potential for increased world production well beyond use depends mainly upon size of foreign acreage and production. A 10 percent increase in foreign production could add 10 million bales more than world use. If so, carryover would be near 53 million bales, for a possible adequate s/u around 45 percent.

While weather and economic growth is the driving force, the lower December ’11 futures has already anticipated a sizable increase in cotton supply for the fall harvest season.

Pricing strategies include pools, marketing associations, forward contracts, the use of “The Seam” price information, and individual pricing with options. Producers need to consider the use of buying a put option somewhat near at-the-money and selling a call around 15 cents out-of-the money. The put adjusted for basis will set a floor price, and the selling of a call will place a ceiling on price received. It will also require margin calls if futures price exceeds call strike price. But, the put will place a floor price that may not be available elsewhere for a lower cost than a put alone.

 

The Ag Market Network Teleconference will be Thursday, February 10, 2011 at 7:30 a.m. Central Time. Featured speakers this month will be Cliff White, Queensland Cotton. Speakers – cotton panel are Mike Stevens, O.A. Cleveland, Carl Anderson, and John Robinson. 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.
 
A Cotton Price Risk Management Seminar coordinated by Cotton Incorporated will be held on February 16, 2011 at the Peabody Hotel in Memphis, Tennessee. The instructors are Dr. Carl Anderson and Dr. John Robinson. They will discuss when and how to use a variety of option strategies including: fences, 3-ways and calendar back spreads. Dr. O.A. Cleveland will be discussing the Cotton Market Outlook. No attendance fee; lunch will be provided. To register contact Kay Wriedt at 919-678-2271 or kstatepr@gmail.com.
 

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